Effect of Federal Small Business Job Protection Act on Pennsylvania S Coporations

The Small Business Job Protection Act of 1996 (P.L. 104-188) liberalized the rules for what corporations can qualify under Subchapter S of the Internal Revenue Code. Among other things, the Act:

1. Increased the number of permitted shareholders 35 from to 75.
2. Allows an "electing small business trust" with multiple beneficiaries to qualify as a S corporation shareholder.
3. Allows charitable organizations and qualified retirement plans (but not individual retirement accounts) to be S corporation shareholders.
4. Allows corporations with subsidiaries to become S corporations (and provided a special "qualified Subchapter S susbsidiary" election so that wholly owned subsidiaries could be considered part of the S corporation for federal income tax purposes.

On May 7, 1997, Gov. Ridge signed HB 134 (Act 7 of 1997), which, among other things, allows Pennsylvania corporations that can qualify as S corporations under the new federal rules (the Small Business Job Protection Act changes) to qualify as S corporations for Pennsylvania income tax purposes.

For corporations previously ineligible to qualify as a Pennsylvania S corporation, this results in a reduction from the 9.9% corporate net income tax rate to the 2.8% personal income tax rate.

This change in law is retroactive to January 1, 1997.