1. Requirements to Maintain S Corporation Status
2. How to Convert From an S Corporation to a C Corporation
3. Determining the Effective Date of the Revocation
4. Tax Considerations With an S Corporation Revocation

Businesses may change from S corp to C corp status for a variety of reasons. If a business no longer meets the IRS requirements for an S corporation, they will have to convert to a C corporation.

Requirements to Maintain S Corporation Status

Requirements to be an S corporation are very strict. To retain your S corporation status, you must meet all of the IRS criteria:

  • You cannot have more than 100 shareholders.
  • Your shareholders cannot be non-resident aliens.
  • Your shareholders cannot be other companies, LLCs, S corporations, etc.
  • You cannot issue more than one class of stock.
  • You must have the approval of all shareholders to become an S corporation.
  • You must file an IRS Form 2553 within a certain period of time.

If the IRS discovers that your business doesn't qualify for S corporation status, they will immediately terminate your election. This can result in negative tax consequences.

How to Convert From an S Corporation to a C Corporation

You are not required to file a specific IRS form in order to revoke your S corporation status. A corporation must file a written statement that is sent to the appropriate IRS service center.

Next, you need to hold a stockholders' meeting and take a vote of shareholders on whether or not to approve a conversion from an S corporation to a C corporation. You must have a shareholder majority in favor of the conversion prior to proceeding with the revocation. There has to be consent from shareholders who have more than 50 percent of the issued stock and outstanding shares. This includes all non-voting stock as well.

Once you have the necessary percentage of shareholders voting to proceed with the revocation, you must then have them sign the resolution in the presence of a notary. Make sure to include in the resolution the number of shares that each signatory holds and the date the shareholder acquired these shares. You then must notify all shareholders that the vote was to proceed with the revocation.

Once all notifications have been made, you have to prepare the letter of revocation for the IRS. It's best to work with an attorney to verify you get the information correct. There are elements that must be included in your revocation letter:

  • Your Employer Identification Number
  • Business address for the corporation
  • The total number of corporate shares
  • The shareholders' resolution that was used to approve the revocation

In your letter, state that your corporation elects to revoke its S corporation status. The letter should be signed by the corporation's legal representative, and it needs to be notarized. Send the letter and resolution to the IRS service center that is listed on the corporation's tax forms.

Determining the Effective Date of the Revocation

Unless you specify an effective date in your revocation, which cannot be one that precedes the revocation statement filing date, your effective date will depend on when in the corporation's tax year the revocation was filed. Revocations filed on or before the 15th day of the third month in the current tax year will be effective for the current year. If your statement is filed later than that date, your revocation will take effect on the first day of the following tax year. When your revocation becomes effective, you will file your taxes for the following year utilizing IRS Form 1120 instead of Form 1120-S, which is the S corporation tax form.

Tax Considerations With an S Corporation Revocation

There are some tax considerations to keep in mind when you are debating on a revocation:

  • When you convert an S corporation to a C corporation, no immediate gain or loss is realized upon the conversion.
  • You are required to distribute all earnings to shareholders in a limited period of time before the distribution of those earnings will be taxed as a dividend.
  • You have a one year grace period for shareholders to withdraw funds that were accrued during the company's time as an S corporation.
  • If you file a revocation mid-year, then the company has to file two tax returns for the year.
  • Remember that once you choose to revoke S corporation status, you cannot elect the status again for five years without prior IRS approval.

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