Modernizes S corporation tax rules, including changes to passive income, shareholder limits, and treatment of built-in gains.

The S Corporation Modernization Act of 2026 amends the Internal Revenue Code to modernize S corporation tax rules. Key changes include increasing the passive investment income limit from 25% to 60%, expanding the definition of passive investment income to exclude certain lending or finance business income, and allowing IRAs to be eligible shareholders. It also increases the shareholder limit from 100 to 250, introduces a withholding tax on nonresident alien shareholders' pro rata share of effectively connected income, and modifies rules for built-in gains and losses.

Modernizes S corporation tax rules, including changes to passive income, shareholder limits, and treatment of built-in gains.

The S Corporation Modernization Act of 2026 amends the Internal Revenue Code to modernize S corporation tax rules. Key changes include increasing the passive investment income limit from 25% to 60%, expanding the definition of passive investment income to exclude certain lending or finance business income, and allowing IRAs to be eligible shareholders. It also increases the shareholder limit from 100 to 250, introduces a withholding tax on nonresident alien shareholders' pro rata share of effectively connected income, and modifies rules for built-in gains and losses.