ICBA - Advocacy - Summary of the Key Subchapter S Reforms in H.R. 4520

Summary of the Key Subchapter S Reforms in H.R. 4520

New Subchapter S Legislation

ICBA-backed Subchapter S Reforms Clear Congress on October 11, 2004

A summary of the key Subchapter S reforms and a link to additional legislative detail on HR 4520 is provided below:


Brief Summary

The Major S Corporation Reform and Simplifications in HR 4520

Members of family treated as 1 shareholder. Allows an election for members of a family to be treated as one shareholder for purposes of determining the number of shareholders. (For 6 generations). (Will make it easier for more banks to comply with the shareholder limitation rules)

Increase in number of eligible shareholders to 100. Increases the maximum number of shareholders by one-third, from 75 to 100. (Many community banks can far exceed this new 100 number because of the provision ICBA added to count all family members as one shareholder)

Expands bank S corporation eligible shareholders to include IRAs. Allows an IRA to hold S corporation bank stock that the IRA held on date of enactment with the IRA owner treated as the shareholder. Allows the stock to be sold to the beneficiary for fair market value upon the corporation making an S election. (Addresses the problem where community banks were prevented from taking advantage of Sub S election because of bank shares held in an IRA account)

Exclusion of investment securities income from passive income test for bank S corporations. Clarifies that interest income and certain dividend income received by a bank are not treated as passive investment income. (This will now allow banks not to worry about the strict passive income limit test that could jeopardize their Sub S status)

Relief from inadvertently invalid qualified subchapter S subsidiary elections and terminations. Provides relief from inadvertently invalid subchapter S subsidiary elections and terminations (Basically helps Sub S banks from being punished with huge fine/tax and termination of their Sub S status because of something they may have done inadvertently)

Information returns for qualified subchapter S subsidiaries. Allows information returns of qualified subchapter S subsidiaries to be filed by the subsidiary. (Clears up current confusion for many shareholders on where their Sub S income is generated)

Repayment of loans for qualifying employer securities. Permits S-Corporations to use distributions on stock held by the ESOP to repay loans, provided that stock of at least equal value is allocated to participant accounts. (Simplifies ESOP rule for Sub S businesses)