When Can I Revoke an Election in an S Corporation?

By Ronna L. DeLoe, Esq.

When Can I Revoke an Election in an S Corporation?

By Ronna L. DeLoe, Esq.

When you set up your corporation, you may have chosen to have it taxed under Subchapter S of the Internal Revenue Code. After evaluating your particular situation—which hopefully included obtaining competent tax advice—you have decided that your S corporation should convert to C corporation status. Revoking your company's S corp. election is not particularly complex, but it must be done in the proper manner.

Basic Revocation Requirements

At some point, you formed a company and filed Election by a Small Business Corporation (Form 2553) to elect to have your corporation taxed under Subchapter S of the Internal Revenue Code. You may revoke your company's S corp. status for the current tax year or for a later date. In order to do this, two basic requirements must be met:

  1. Shareholders must vote on the revocation. The revocation must be with the agreement of shareholders who together hold more than 50% of the outstanding shares of stock at the time of revocation. This is regardless of whether the corporation's shares are voting or nonvoting shares and should be done by taking a vote of shareholders in compliance with state law and the corporation's bylaws.
  2. Federal notification must be made. The corporation must give proper written notice to the Internal Revenue Service (IRS). The specific requirements of such a notice are discussed below.

Date of Revocation

There are IRS rules regarding when a revocation is effective. To revoke S corp. status effective at the beginning of the current tax year, the revocation notice must be received by the IRS no later than the 16th day of the third month of the tax year. For example, if the corporation's tax year is the same as the calendar year, the revocation would need to be made by March 16. This revocation would apply retroactively to January 1.

If the revocation notice is received by the IRS after the 16th day of the third month, the revocation will be effective at the beginning of the next tax year, unless another date is specified in the notice. In the example above, if you miss the March 16 deadline, the revocation would not be effective until January 1 of the following year.

If a date other than the first day of the current year or the first day of the next tax year is specified in the notice, the specified date will be the effective date. However, the IRS must receive the revocation notice by the effective date. For example, if you specify an effective date of June 1, the notice must be received by IRS on or before that date.

A mid-tax-year revocation may require additional filings, with accompanying accounting complications. Be sure you understand what is required before making such a midyear change.

Notice Requirements

Because the IRS does not currently have a form for revoking S corp. status, you must create your own statement of revocation. The document must contain the following information:

  • A statement that the corporation is revoking its Subchapter S election made under Section 1362(a) of the Internal Revenue Code.
  • The corporation's name and employer identification number (EIN).
  • The number of outstanding shares of stock owned by the shareholders at the time the revocation statement is made, regardless of whether the stock is voting or nonvoting.
  • The effective date of the revocation.
  • Each shareholder's name, address, and taxpayer identification number, which is often their Social Security number.
  • The number of shares owned by each shareholder.
  • The date or dates when the shares were acquired by each shareholder.
  • The date each shareholder's tax year ends.
  • A provision that the shareholders signing the statement consent to the revocation of the Subchapter S election on the effective date.
  • Each consenting shareholder's signature, along with a statement that the shareholder is signing under penalty of perjury.
  • The signature of a person who is authorized to sign the S corporation's tax returns.

The statement must show that the revocation is consented to by shareholders who collectively own more than 50% of the total number of shares. The completed document is then sent to the IRS center where the corporation's tax returns are filed.

Revoking S corporation status is a bit time-consuming but not overly difficult. Be sure to check with your state's business regulation and tax agencies to find out if any state filings are also required.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.