A good number of modern businesses prefer to operate as S corporations to avert the complication of C corporations and to avoid double taxation. C corporations are taxed before the money is shared with their shareholders who are taxed yet again; however, the income of S Corporations tends to flow directly to shareholders who are then tasked with paying taxes on their personal returns.
However, there comes a time and day when an organization outgrows its S Corp status and the company would want to revoke it in favor of operating as a C corp. Note that a business’s specific circumstances or changes in the tax code will dictate whether a company will have better financial outcomes from maintaining an S Corp or returning to its original tax status.
For instance, a C Corp that has elected for S Corp tax treatment may want to go back to the default C Corp tax treatment because it believes it will reduce its income tax obligations. Without an S Corp election, a C Corp is taxed at the corporate tax rate rather than having profits and losses flow through to shareholders’ tax returns.
Steps to Revoke S Corp Status
It’s not particularly challenging, but you are expected to follow stipulated IRS structures and understand the implications of timing. While laws can vary from one state to another, here are general steps to take;
Send a Letter to the IRS
To revoke the S Corp election, business owners will have to submit a statement of revocation to the IRS service center where they file their annual income tax returns. According to the IRS, the letter is expected to note that the corporation revoked the election made under Section 1362(a). Most often, it is expected to also provide the:
- Names of the shareholders
- Their addresses
- Taxpayer identification numbers of the shareholders
- The number of shares of stock owned by each shareholder
- Dates on which the stock was acquired
- The date on which each shareholder’s taxable year ends
- The name of the S corporation
- The S corporation’s EIN
- The election which the shareholders revoke
- The statement must be signed by the shareholder(s) under penalties of perjury
- Signature and consent of shareholder(s) who collectively own more than 50% of the number of issued and outstanding stock of the corporation, (whether voting or non-voting)
Attach a Statement of Consent From All Shareholders
If your company was an LLC and you intend to revert to LLC status, you will be expected to also attach a statement of consent to the letter of revocation. Have it in mind that this statement explicitly states to the IRS that all of the LLC’s members concur to the revocation. This statement of consent is expected to include:
- The LLC’s name and EIN
- A statement that all of the members consent to revoke the S Corp status
- The members’ names, mailing addresses, Social Security numbers, percentages of ownership, and the dates they became owners
- The end dates of the members’ tax years
File IRS Form 8832
Have it in mind that any business seeking to revoke its S Corp status will also have to let the IRS know how it intends to be classified for federal tax purposes after its S Corp revocation goes into effect. S corps that revoke their S Corp elections are automatically taxed as C corps. If you desire another tax status, you will then have to fill and submit Form 8832. For more directions, note that:
- A single-member LLC can use Form 8832 to tax the company like a sole proprietorship.
- A multi-member LLC can use Form 8832 to tax the company like a partnership.
Understand the Timing
If business owners intend to revoke the S Corp election may be from the first day of their tax year, then they will have to submit their statement by the 16th day of the third month of the tax year. For instance, if a company’s tax year runs from January 1 to December 31, its revocation statement will have to be received by the IRS by March 16 (or by March 15 in a leap year).
However, if they intend to end the S Corp election on a date other than the first day of the tax year, then they will have to ensure that the IRS received their statement of revocation by the requested effective date. For instance, if a company’s tax year runs from January 1 to December 31, and the owners want a June 30 effective date, the revocation is due by June 30.
Approved Revocation of the S Corp Status
For a revocation application to be approved, the letter of revocation and all accompanying documents are expected to show that the consensus of its owners approves the termination of the S Corp status. Most often, unanimous consent (agreement of all owners) isn’t required.
C Corporations will need to show or have majority shareholder consent, and LLCs are expected to have majority member consent — unless otherwise noted in the bylaws or LLC operating agreement. However, if the state where the LLC or C Corp is registered also treats the company as an S Corp for tax purposes, the business owners will need to provide their statement of revocation to the state’s tax agency.
To revoke S Corp status, you only need to follow stipulated IRS structures and understand the implications of timing. Also, note that you can still change back to an S Corp as long as your company still meets the IRS’s eligibility requirements. Also, note that you will need the unanimous consent of the C Corporation’s shareholders or LLC’s members to do so.
If your company is no longer an S Corp, there are other tax statuses to consider, depending on the situation of your business. These include a C Corp, sole proprietorship, or partnership. Have in mind that all of these have their benefits and disadvantages. Ensure to reach out to an attorney to note the exact one that is right for your business.