# S Corporation Modernization Act of 2024: What It Actually Does

This bill makes changes to how S corporations—a common business structure for small and medium-sized companies—are taxed, particularly when an owner dies and when the company earns investment income. The changes are designed to make S corporations more flexible and easier to operate.

The first major change deals with what happens when an S corporation owner passes away. Currently, when someone inherits S corporation stock, they get a tax break on the increased value of that stock (called a "step-up in basis"). However, the company's underlying assets don't get this same benefit, which can create a tax problem. This bill allows heirs to take deductions over 15 years for the difference between what they inherited and what the company's assets were actually worth. If the company sells assets during that time, the heirs can claim larger deductions in those years. This essentially gives heirs a way to avoid being hit with a big tax bill when the company eventually sells its property or equipment. For family businesses, this could mean the difference between being able to keep the business running or having to sell it to pay taxes.

The second major change relaxes rules about how much "passive income" (money from investments like interest, dividends, and rent) an S corporation can earn without losing its special tax status. Currently, if an S corporation earns more than 25 percent of its income from passive sources, it faces a tax penalty and can lose its S corporation status entirely. This bill raises that threshold to 60 percent and eliminates the threat of losing S corporation status altogether. This matters for business owners who have some investment income mixed in with their operating business—they'll have much more flexibility without worrying about accidentally triggering a tax penalty or losing their chosen business structure.