President's Tax Reform Proposal Would Change S Corporation Taxation

President Obama's "Framework for Business Tax Reform" (available at this link) would change S corporation taxation rules so that "large" S corporations (the term "large" is undefined in the document) would be taxed as C corporations rather than as pass-through entities. There is no specific mention of ESOPs, but, presumably, if S corporation ESOP companies were now taxed as C corporations, the ability to avoid income tax on the percentage of ownership held by the ESOP would no longer apply.

The proposal is part of a sweeping set of recommended changes aimed at simplifying business tax rules and not using the tax system to favor specific kinds of investments or business forms. There is, however, no current effort to move on the proposals in Congress.