Congress is looking at targeted, bipartisan reforms to make the tax code work better for taxpayers. That focus creates an opportunity to address the outdated rules governing S corporations.
S corporations are America’s most popular business structure, with more than 6 million businesses employing tens of millions of Americans. Yet one of the basic rules governing them has been frozen for more than two decades. An S corporation may have no more than 100 shareholders, a limit that increasingly gets in the way as successful businesses seek to expand their employee-ownership.
The good news is that lawmakers already have two ways to fix it. The S-CAP Act introduced by Representative French Hill and Senator John Boozman raises the shareholder limit from 100 to 250. As our letter supporting the measure reads:
The current 100-shareholder limitation is an outdated constraint that has no clear policy rationale. Since the creation of subchapter S in 1958, Congress has repeatedly recognized the need to modernize the rules governing S corporations to reflect changes in the business landscape. The shareholder limit was initially set at 10 but was gradually increased through bipartisan reforms, reaching 35 in 1982 and 75 in 1996 before being raised to the current 100-shareholder cap, where it has remained for over two decades.
Meanwhile, the S Corporation Modernization Act introduced by Representative Carey and Senator Sheehy is a broader package updating several longstanding S corporation rules. It adopts a slightly different approach by treating all employee-owners as a single shareholder, just as family owners are now. As we pointed out back in July, the legislation is the latest in a more than three-decade effort to modernize the rules governing S corporations, with a number of those reforms ultimately enacted into law.
Each approach continues a long tradition of Congress modernizing the rules governing the S corporation community. The shareholder cap was last increased back in 2004. More than two decades later, another update is overdue.
With lawmakers focused on targeted, commonsense improvements to the Tax Code, updating the S corporation shareholder rules should be an easy one. America’s most popular business structure deserves rules that reflect how businesses operate today. Raising the S corporation shareholder cap for Main Street businesses would extend opportunities to the employees who help these businesses succeed.