Revoking an S-Corp Election: A Comprehensive Guide

How do you revoke an S-Corp election?
To revoke a Subchapter S election/small business election that was made on Form 2553, submit a statement of revocation to the service center where you file your annual return. The statement should state: The corporation revokes the election made under Section 1362(a)
Read more on www.irs.gov

The Internal Revenue Code’s “subchapter S” refers to a tax designation that enables corporations to avoid double taxation, and the “S” in “S-Corp” stands for it. S-Corporations are not liable to federal income tax, in contrast to C-Corporations. Instead, the firm passes along its income, credits, and deductions to its shareholders, who then include the income on their personal tax filings. But occasionally a business might decide to reverse its S-Corp election. This article will explain how to cancel an S-Corp election and address some frequently asked issues about it.

How to Cancel an Election for an S-Corp

You need to file Form 1120S with the IRS in order to revoke an S-Corp election. You must specifically check the item that says the company is cancelling its S-Corp election. No later than the 15th day of the third month of the corporation’s tax year, or the 15th day of the second month of the tax year if the corporation is a calendar year taxpayer, must an authorized officer of the corporation sign the form before it is filed. The corporation will be taxed as a C-Corporation after the revocation is made. Changing from a Sole Proprietorship to an S-Corp

By submitting Form 2553 to the IRS, a sole owner can convert their business at any time to an S-Corp. However, you must adhere to certain conditions, such as having fewer than 100 shareholders, just one class of stock, and all shareholders being either individual investors or specific kinds of trusts. The form must also be submitted between two months and fifteen days of the start of the tax year in which the election is to be effective.

When Changing from a C-Corporation to an S-Corp, NOLs

Any accumulated net operating losses (NOLs) for a C-Corporation must be recognized when it changes its status to an S-Corp. This is due to the fact that S-Corporations are not permitted to deduct NOLs from income from earlier years. There are, however, several ways to lessen this tax burden. The C-Corporation might, for instance, utilize its NOLs to offset any gain realized from the sale of its assets prior to the conversion. The company might also carry the NOLs forward and use them to reduce future taxable income.

Integrated Gains Tax

A built-in gains tax might apply when a C-Corporation becomes an S-Corporation. This tax is intended to stop C-Corporations from converting to S-Corporations and selling valuable assets right away to avoid paying taxes. The tax is equivalent to the amount that would be levied if the corporation sold all of its assets for their fair market worth, less the smaller of the net recognized built-in gain or the net recognized gain. Only the initial five years following the conversion are subject to the built-in gains tax.

In conclusion, Form 1120S must be submitted to the IRS in order to revoke an S-Corp election. A sole proprietorship can become an S-Corp by filing Form 2553 and fulfilling certain prerequisites. The corporation must record any net operational losses it has accumulated when changing from a C-Corporation to an S-Corp, and it may be liable to a built-in gains tax for the first five years following the conversion. Before making any alterations to your business entity, it is crucial to speak with a tax expert.

FAQ
In respect to this, can s corp retained earnings be negative?

Yes, retained earnings for S-Corps can be negative. This might occur if the S-Corp experiences losses or pays out more to its shareholders than it does in profits. Negative retained earnings, however, should be noted as they may have tax repercussions and may limit the S-Corp’s capacity to distribute money to shareholders in the future.