First State Bank of Junction, Texas, jumped on the S-Corporation bandwagon back when the statute could only help banks with fewer than 35 shareholders. Now there is a bill in Congress which would hike the number to 150, essentially doubling the number of banks which can take advantage of the tax savings to about 2,000–a large chunk of all the private banks in the country.

First State Bank’s decision to elect S Corp. tax status was "pretty simple" according to Dennis Smith, vice president of operations: "It’s just a dollars and cents issue."

Under the old C-Corporation structure, the $22-million-asset bank’s profits were taxed twice: at the corporate and shareholder levels. Smith said that the bank stands to save one-third, or about $100,000, of earnings that can be shared with the small band of investors.

First State is one of a growing tide of banks making the status switch. Tax expert Marc Levy of Arthur Andersen has logged quite a few miles recently traveling to advise clients on how to join the ranks of nearly 1,100 banks that are already S Corp. firms.

Rep. Marge Roukema, R-N.J., this year introduced legislation similar to that introduced last year in the Senate that would bump up the number of eligible shareholders to 150 from the current 75, and expand the definition of "shareholder" to include Individual Retirement Accounts. It would also consider bank directors’ stock the same as common stock, to avert the restriction on S Corp. status that the bank only have one kind of stock, and to clarify that interest on investment securities held by a bank does not conflict with the passive investment income restrictions normally on S Corps.

Ron Ence, legislative director for the Independent Bankers Association of America, estimated that based on a survey of his members the number of banks electing S Corp. status would double with the passage of the bill. The member survey showed that 30% had already elected S corp., and another 40% wanted to but could not because they had too many shareholders or had shareholders through IRAs.

Carol Kulish, a principal at Deloitte, said she believes the legislation has a decent shot at passage this year.

"The likely vehicle for this would be broader tax cut legislation, budget reconciliation or tax simplification legislation," she said, noting that with the sizable budget surplus, Republicans have made it known that tax cuts are a priority.