Senate bill would reform tax code for S Corporations

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U.S. Sens. John Thune (R-SD) and Ben Cardin (D-MD) are sponsoring legislation to reform the tax code for S corporations.

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An S corporation, in general, does not pay any income taxes. Instead, the income or losses are divided among its shareholders, and the shareholders must report the income or loss on their own individual tax returns. S corporations are the most common form of business structure in the U.S., with more than 4 million in existence today.

“While I believe we’ve made a great deal of progress toward strengthening the tax code for families and businesses, I think there is always more that Congress can and should do to help further modernize it, the boundaries of which are constantly being tested by innovation and entrepreneurship,” Thune said. “S corporations are located in nearly every single city and town across America, particularly in those throughout rural America, which is why it’s important for our tax code to keep up with these businesses and the communities in which they operate.”

The S Corporation Modernization Act (S. 2156) would reform the tax code related to an additional tax on S corporations that have previously converted from C corporations if more than 25 percent of the S corporation’s income is passive – such as rents, royalties, and interest). This bill would increase the threshold to 60 percent.

It also permits any S corporation bank to have IRA shareholders. Currently, IRA ownership of S corporation banks is limited to only those S corporation banks with stock held by an IRA.

“S Corporations, which employ more than 600,000 Maryland workers, are critical to the well-being of the Maryland economy and support thousands of middle-class families,” Cardin said. “I’m pleased to work with Senator Thune on this bipartisan legislation that will spur investment in S Corporations so they can better attract capital, innovate, invest in their communities, and create jobs.”

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