Because it permits pass-through taxation and restricts personal responsibility, a S corporation is a preferred type of corporate structure among small business owners. A business owner might eventually decide to revoke their S election, whether it’s to profit from new tax advantages or to adopt a new organizational structure. The following information will help you break a S election.
An S corporation reverts to C corporation status when it revokes its election. With the corporation now paying taxes on its income and the shareholders paying taxes on their dividends, the business will now be subject to double taxation. The corporation may also lose some of the tax advantages that come with being a S corporation and will no longer be able to benefit from pass-through taxes.
If a S corporation doesn’t follow specific guidelines established by the IRS, it risk losing its status. For instance, the corporation can lose its S election status if it has more shareholders than is permitted (now 100). The corporation may potentially lose its status if any of its stockholders are foreign nationals or residents. An S corp’s status could potentially be lost for failing to submit yearly reports or satisfy other IRS criteria.
There are several adjustments that a corporation can make without having its S election terminated. Changes to the corporation’s name, address, or purpose of operation, for instance, have no impact on its S election status. Similar to this, the S election of the corporation will not be revoked by the issuance of additional shares of stock or by the replacement of any of its officers or directors. Can the IRS revoke S Corporation Status?
If a S corporation doesn’t comply with the Internal Revenue Code’s standards, the IRS has the authority to revoke its status. This includes neglecting to submit yearly reports, not fulfilling shareholder obligations, or taking part in illegal transactions. When it comes to taxes, a S corporation will be classified as a C corporation if the IRS revokes its S classification.
In conclusion, a business may suffer serious tax repercussions if it violates a S election. Before making any changes to the way your firm is structured, it’s crucial to thoroughly weigh the advantages and disadvantages of revocation of a S election. You should also consult a tax expert for help. In order to keep your corporation’s S election status and prevent any potential revocation, it’s crucial to make sure that it complies with all IRS criteria.