As a continued effort to find ways to bolster small business growth and investment, this week I co-authored the S Corporation Modernization Act of 2009 (H.R. 2910), which would modify an unreasonable penalty paid by S corporations.

The most important part of this bill is a commonsense tax code change that will have huge returns in terms of growth and investment for S corporations.  Especially in this tough economic time, my goal is to look out for the small and family-owned businesses which drive our economy.  This bill speaks to that, reducing a penalty on S corporations, and thus encouraging them to reinvest the savings into growing their business and creating jobs.

There are 3.8 million registered S corporations nationwide.  S corporations are small and family-owned businesses that have between 1 and 100 shareholders and are taxed differently than large corporations.  Right now, S corporations are taxed twice on assets they sell within 10 years of converting to this tax classification—making the sale and reinvestment of these assets prohibitively expensive and hindering growth and job creation.

The American Recovery and Reinvestment Act changed the law now requiring S corporations to hold on to unproductive and inefficient assets for only seven years, a more realistic business cycle and the permanent relief I am pushing with the S Corporation Modernization Act of 2009.   The current seven year requirement, enacted by the Recovery Act, is only in effect through 2010, at which time S corporations will again be required to hold assets for 10 years, limiting cash flow and availability and encouraging excess borrowing.

In this economy, the seven year requirement is helping S corporations successfully manage their business, proving it a necessary update to current law.  In the long run, a three-year reduction in this unreasonable and unproductive penalty will help ease the overall tax burden on small and family-owned businesses and help them grow and prosper in an increasingly competitive market.