Guide on Revoking S Corporation Status

The S Corporation (S Corp) is a popular choice among businesses in the United States, offering several benefits such as avoiding double taxation and saving on employer taxes. However, there are certain guidelines that an S Corp must adhere to, and failure to meet these criteria may result in the involuntary revocation of the S Corp status.

Reasons for Revoking an S Corp Election

An S Corp may be revoked if it exceeds 100 shareholders, has a non-U.S. citizen shareholder, or derives more than 25% of its income from passive sources for three consecutive years. If a company wishes to attract more than 100 shareholders/investors, it must revoke its S Corp election. Other reasons for revoking an S Corp election include failure to meet eligibility criteria or if the corporation voluntarily chooses to revoke the election.

The Revocation Process

The revocation statement must be signed by shareholders who collectively own more than 50% of the issued and outstanding stock. The filing date for revocation is generally the statement's mailing date, determined by the postmark. The exact date for the S Corp revocation to take effect should be stated in the revocation statement.

The first step for S Corp revocation is to have a vote. A majority vote of shareholders is required for S Corp revocation. The revocation statement must include specific details, such as the corporation's name, Employer Identification Number (EIN), and shareholder information.

Consequences of Missing the Revocation Deadline

Missing the revocation deadline results in the company being taxed as an S Corp for the remainder of the tax year. The revocation statement must be submitted to the IRS service center where the annual return is filed. Documentation of the S Corp revocation vote is necessary.

Becoming a C Corporation

Becoming a C Corporation may be an advantageous selection for companies with significant income due to the lower corporate tax rate (currently a flat 21%, according to the Tax Cuts and Jobs Act of 2017). However, it's important to note that an Initial Public Offering (IPO) is not possible due to the limited number of shareholders allowed in an S Corp.

S Corp Eligibility and Limitations

S Corps are limited to 100 shareholders. Each owner/shareholder must be a U.S. citizen or resident alien. Venture capitalists are forbidden to invest in S Corps. S Corps can only offer one class of stock.

In conclusion, understanding the guidelines and consequences of revoking an S Corp election is crucial for any business considering this step. It's essential to comply with the eligibility criteria and deadlines to avoid any unwanted tax implications. Consulting with a tax professional can help ensure a smooth transition if revoking the S Corp election is the best choice for your business.