S-CAP Act Raises S-Corp Shareholder Limit to 250: More Small Businesses Get Tax Breaks Starting 2026

The S-Corporation Additional Participation Act of 2025, or S-CAP Act, is making a straightforward but significant change to who qualifies for a specific small business tax status. Right now, if your business wants to be taxed as an S corporation—which means the profits and losses pass directly through to the owners’ personal income without being taxed at the corporate level—you can’t have more than 100 shareholders. This bill simply raises that ceiling. Under the S-CAP Act, businesses can have up to 250 shareholders and still maintain that favorable S-Corp status. This change applies to tax years beginning after December 31, 2025, meaning it kicks in for the 2026 tax season.

The Cap Just Got Higher: Why 250 Matters

For most small businesses, the 100-shareholder limit is never an issue. But for businesses that are growing fast, maybe through successive rounds of investment or employee stock ownership plans, that 100-person limit becomes a real headache. Hitting the cap forces a company to either restructure into a standard C corporation—which subjects them to corporate income tax—or halt their growth and investment plans. This provision directly addresses that bottleneck by amending Section 1361(b)(1)(A) of the Internal Revenue Code. By raising the limit to 250, the bill gives these scaling businesses more flexibility to bring in capital or reward key employees with equity without sacrificing their tax structure.

Real-World Impact: Flexibility for Growing Companies

Imagine a successful tech startup that started with three founders and has since expanded to 80 employees, all of whom have received stock options. They are nearing the 100-shareholder limit, and the founders want to raise more capital from angel investors to expand their product line. Under the current law, that capital raise could easily push them over the limit, forcing them into a less favorable tax structure. Under the S-CAP Act, that same company gains an extra 150 slots. This means they can raise the necessary capital and continue rewarding their employees with equity while keeping the efficient pass-through taxation that helps their owners avoid double taxation. It’s a clean win for businesses that are in that crucial growth phase between a very small operation and a huge public company.

What to Expect in 2026

Because this change is purely administrative and procedural—it just changes a number in the tax code—implementation should be relatively smooth, though it won't affect anyone's taxes until 2026. The bill is a straightforward adjustment that recognizes the reality of how modern small businesses grow and raise capital. It offers a practical solution for companies that are too large for the current S-Corp rules but still need the tax efficiency to reinvest in their operations and continue scaling up.