S-corporation reform outlook - legislation in Congress would make it easier for small companies to register as S corporations - Brief Article

Nation's Business, Sept, 1995 by David Warner

Businesses organized as S corporations could soon benefit from legislation introduced recently in both houses of Congress. The House measure is sponsored by E. Clay Shaw Jr., R-Fla., and the Senate legislation by Orrin G. Hatch, R-Utah, and David Pryor, D-Ark. Both measures have bipartisan support.

Advocates of S-corporation reform are urging lawmakers to include the legislation in a budget-related tax package expected to be crafted by the House Ways and Means and the Senate Finance committees in September.

The measures would make it easier for small companies to organize as S corporations and to raise capital to expand. Among other reforms, the bills would:

* Increase to 50, from 35, the number of individuals or entities allowed to own shares in an S corporation.

* Allow some tax-exempt organizations, including charities and employee stock-ownership plans, to own stock in S corporations.

* Permit all members of a family owning stock in an S corporation to be treated as a single shareholder.

* Allow S corporations to own 100 percent of the stock of other S corporations and to own more than 80 percent of the stock of C corporations.

* Allow all S-corporation shareholders to exclude from income most fringe benefits--though not health-insurance premiums--they receive from the business. Currently, shareholders who own more than 2 percent of an S corporation's stock cannot exclude the value of any fringe benefit received from the corporation.

For tax purposes, S corporations pass their income or loss to shareholders of the business. Income generated by S corporations is not taxed at the corporate rate but is distributed to shareholders, who are taxed at their respective individual rates. The same tax treatment is accorded to partnerships and sole proprietorships.

The income of a regular, or C, corporation is taxed first at the corporate rate and then at individual rates when it is distributed as dividends to shareholders.

About 1.9 million U.S. companies are organized as S corporations. The term is derived from an Internal Revenue Service Code subchapter.