Can You Reverse an S Corp Election? Exploring the Possibility

S corporations, often known as S corps, are a well-liked kind of corporate organization in the US. They provide small business owners with a variety of tax advantages, including the potential to prevent pass-through and double taxation. But occasionally, things change, and business owners may decide that making a S corp election is no longer the best course of action for their organization. In this post, we’ll look into the issue of reversing a S corp election and other problems related to it.

The answer is that a S corp election can be overturned. This procedure is known as revocation. The business must notify the IRS in writing of its intent to revoke a S corp election before doing so. All of the company’s stockholders must affix their signatures to this letter. The date stated in the letter must be less than two months and fifteen days before the start of the tax year for which revocation is wanted in order for it to be effective.

As previously stated, the date given in the letter of revocation marks the effective date of the revocation of a S corp election. This day ought to fall between two months and fifteen days and the start of the tax year for which revocation is requested. For instance, a firm must send the revocation letter to the IRS no later than March 15, 2022, if it wishes to cancel its S corp election for the 2022 tax year.

What Takes Place If an LLC Revocates Its S Election? Following the same procedure stated above, an LLC that has previously chosen to be taxed as a S corp may revoke that choice. The LLC will be taxed as a partnership or sole proprietorship depending on the number of owners once the revocation takes effect. Any accrued earnings and profits will be paid out as taxable dividends to the shareholders. What Will Cause a S Election to End?

– The business is no longer qualified to maintain its S corp classification.

– The business does not submit required tax returns or payment in a timely manner.

– The business voluntarily revokes its choice to become a S corp.

– A corporation that is ineligible for S corp classification acquires the business.

An S corp election cannot be retroactively made. Only the beginning of the current tax year or a future tax year may be used to revoke a S corp election. It cannot be implemented in the past. Backdating is a significant offense that the IRS views as tax fraud.

In conclusion, the revocation process allows for the reversal of a S corp election. This entails sending an official letter to the IRS that is signed by each shareholder and includes the date when the revocation will take effect. It is significant to remember that the revocation cannot be applied retroactively and that a S corp election may be terminated by a number of different circumstances. Before making any choices about the tax status of their organization, business owners should speak with a tax expert.