- November 4, 2023
- Posted by: Web Digital Media Group
- Category: S Corporation
The termination or revocation of an S-Corp election, once made, remains effective until intentionally terminated.
The S-Corp election can automatically terminate under the following circumstances:
- The corporation no longer qualifies as a small business corporation.
- For three consecutive years, the corporation accumulated earnings and profits while deriving over 25% of its gross profits from passive investment income.
- The corporation issues a second class of stock (e.g., preferred and common stock) that violates the S election.
- Automatic termination occurs due to non-compliance with S corporation status requirements.
Revoking the S corporation election requires the consent of the majority shareholders, holding more than 50% of the corporation’s stock.
The corporation must submit a revocation statement signed by consenting shareholders to the IRS.
How to Report Taxes after the Termination of the S election
Upon termination, the corporation creates short tax years, with income and losses prorated between its time as an S Corp and the subsequent period as a C corp.
If the S corp files Form 1120-S for the short tax year by the due date (including extensions), and the C corp files its Form 1120, the revocation’s effective date can be specified.
If no date is indicated and the revocation is submitted by the 15th day of the third month of the tax year, it takes effect from the start of that year. Otherwise, it applies from the beginning of the next tax year.
It’s possible to rescind a revocation before it becomes effective.
An example to illustrate all of this:
For instance, on May 1, 2018, Biomedical Corporation exceeded one hundred shareholders, leading to the creation of two short tax years: one for the S Corp and one for the C Corp. The Form 1120-S for the short year ending April 30, 2018, is due on July 15, 2018, representing the tax return for the terminated S corporation. The Form 1120 for the short year starting May 1, 2018, and ending December 1, 2018, is due on April 15, 2019, representing the tax return for the new C corporation following the S-Corp termination.