Terminating an S election by revocation.

AuthorVance, M. Andrew

Circumstances may arise where more favorable results are achieved by not operating as an S corporation. For example, for tax years beginning after Dec. 31, 2017, the corporate tax rate is a flat 21%, with a blended rate (Sec. 15) applicable to fiscal-year corporations with year ends after that date. Additionally, the corporate alternative minimum tax is repealed for tax years beginning after Dec. 31,2017. Because of these changes, shareholders may want to revoke an S election. Furthermore, the shareholders may want to revoke the S election to take advantage of the more favorable fringe benefit rules or fiscal-tax-year rules available to C corporations. Finally, shareholders may find it impossible to continue meeting the S corporation eligibility rules because of a desire, for example, to admit an ineligible shareholder (such as a corporation or a nonresident alien individual) or to issue preferred stock with differing rights to distribution or liquidation proceeds.

Revoking the S election

To voluntarily terminate its S status, a corporation may file a revocation for any of its tax years, including the first tax year for which the election is effective (Sec. 1362(d)(1)(A)).

The revocation is made by a corporation in the form of a statement filed with the IRS Service Center where the corporation properly filed its S election, Form 2553, Election by a Small Business Corporation. The statement should be signed by a person authorized to sign Form 1120S, U.S. Income Tax Return for an S Corporation, (i.e., a corporate officer) and must provide (Regs. Sec. 1.1362-6(a)(3)):

* That the corporation is revoking its election under Sec. 1362(a) to be taxed as an S corporation;

* The number of shares of stock, including nonvoting stock, outstanding at the time the revocation is made; and

* The effective date of the revocation, if it is to be a prospective revocation (see below).

Law change alert: The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, allows S corporations converting to C corporations by a revocation to amortize any positive Sec. 481(a) adjustment over a six-tax-year period if required to make an accounting method change to conform to C corporation rules as a result of the revocation. For example, if the entity that converted into a C corporation is required to use the accrual method of accounting, the calculated Sec. 481(a) adjustment can be taken into account over six tax years. To get this benefit, the corporation must have...

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