On June 17, Rep. Ron Kind (D-Wis.) introduced the S Corporation Modernization Act of 2009 (H.R. 2910). Joining Congressman Kind in sponsoring the legislation were fellow Ways & Means Committee Members Wally Herger (R-Calif.), Allyson Schwartz (D-Pa.) and Dave Reichert (R-Wash.).

The legislation is the companion bill to legislation S. 996 introduced in the Senate by Blanche Lincoln (D-Ark.) in May, and includes a provision to make permanent the built-in gains reform enacted as part of the larger economic stimulus package adopted earlier this year.

Essentially, the bill is designed to update and simplify S corporation rules—some that date back 50 years—to make it easier for small and closely-held businesses to raise capital and compete in a difficult economy. The S Corporation Modernization Act would:

• Enhance the ability of S corporations to attract and raise capital;
• Make it easier for family-owned S corporations to stay in the family; and
• Encourage additional charitable giving by S corporations and the trusts that hold them.

S corporations are small and family-owned businesses that have between 1 and 100 shareholders and are taxed differently than large corporations. Currently, S corporations are taxed twice on assets they sell within ten years of converting to this tax classification—making the sale and reinvestment of these assets prohibitively expensive and hindering growth and job creation. In some states, the double-tax burden can reach as high as 70 percent.

The American Recovery and Reinvestment Act changed the law from requiring S corporations to hold on to unproductive and inefficient assets for ten years to now requiring their ownership for only seven years. This seven year requirement is only in effect through 2010, at which time S corporations will again be required to hold assets for ten years, limiting cash flow and availability and encouraging excess borrowing. To provide permanent relief, H.R. 2910 would allow S corporations to liquidate unproductive assets after seven years—freeing up capital to be used to grow the business and create new jobs.

In a statement accompanying the legislation, Rep. Kind noted, “This bill is a commonsense tax code change that will have huge returns in terms of growth and investment for S corporations. Especially in this tough economic time, my goal is to look out for the small and family-owned businesses which drive our economy. This bill speaks to that, reducing a penalty on S corporations, and thus encouraging them to reinvest the savings into growing their business and creating jobs.”

NSBA signed onto an association letter of support for both House and Senate bills.