Bestselling
Author Of

Can I convert an S Corporation to a C Corporation?

You can convert an S corporation to a C corporation.

Let me issue a caution though: You want to convert from an S corporation to a C corporation only after having your tax advisor calculate the change in taxes that result from the conversion.

Two Approaches for Conversion

Okay. You have a couple of approaches available for converting an S corporation to a C corporation.

You can, for example, do something that causes the S corporation to lose its eligibility to be an S corporation. For example, you could sell one share of stock to an ineligible S corporation shareholder. Or you could create a second class of stock--for example, preferred stock.

You can also officially revoke the S status by filing a statement of revocation with the Internal Revenue Service.

Instructions for S Status Revocation

If you want to revoke a previously-made S election, you file the revocation statement with the IRS service center you've been sending your S corporation income tax return to.

For example, if you usually file your S corporation tax return with the Ogden service center in Utah, you send your S corporation revocation to Ogden.

To intentionally revoke the "S" status of an S corporation, a majority of the S corp's shareholders need to agree to revoke the "S" status. If you have shareholders residing in community property states (such as Washington or California, to name two) and these shareholder's shares are counted as part of the majority, these shareholder's spouses should agree to the revocation, too.

Currently, the IRS doesn't have a form for making the revocation. But you can create a revocation statement yourself or with a tax practitioner's help. The statement should include the number of shares outstanding at revocation date; the name, address and employer identification number of the S corporation; and the effective revocation date. The person who usually signs the S corporation income tax return should sign the statement.

The revocation statement should be delivered to the Internal Revenue Service by the 15th day of the third month of the tax year. For example, if you wanted to revoke your S corporation status as of January 1 of some year, you would want to file the revocation statement by March 15 of that same year.

One final comment: You may (or may not) get an acknowledgement letter.

Back to list of frequently asked questions

 

 

Additional Information You May Find Useful

If you want additional information about how to maximize the tax savings related to running a business or investment venture, you may also be interested in one of our downloadable e-books (see descriptions below). Each book covers a category of tax planning topics that easily save a business owner significant amounts of income or self-employment taxes (potentially thousands of dollars a year) and is instantly downloadable.

Small Business Tax Deductions Secrets cover image

One of the most powerful tactics for saving small business taxes is maximizing your deductions. You can literally save thousands in taxes each year.

Read More
S Corporations Salary Secrets cover image

Using an S corporation for your business? To maximize savings, you need to minimize the salary paid to shareholders. But this decision is tricky.

Read More
Real Estate Tax Loopholes cover image

Tax laws provide active real estate investors with giant tax planning loopholes. A little upfront planning on your part could save you thousands a year...

Read More