Terminating S-Corporation Status

Have you decided that, following passage of the Tax Cuts and Jobs Act of 2017, you would be better off if your business were a C corporation instead of an S corporation? Are you regretting that you ever made that S election or wishing you had thought this through and acted sooner? Fret not … there is still time to terminate your company’s S-election and be taxed as a C-corporation for the entire 2018 year! As long as it is done by March 15th, the termination will be retroactive to January 1st and effective for the 2018 tax year.

First, you will need to make sure that at least a majority interest of shareholders (i.e. shareholders who collectively own more than 50% of the voting interest in the corporation) are on board because a majority is needed to terminate the S election. You should also check your Bylaws and Shareholders Agreement for whether a super majority or unanimous consent is required to terminate S election. Accordingly, your first step should be drafting a corporate resolution seeking the appropriate consent of the shareholders to terminate S status. Once that has been accomplished, the next step is filing the papers with the IRS, which basically consists of submitting a letter of consent to the IRS that demonstrates consent by the shareholders to terminate S status and includes a slew of required information. Finally, you should check with your state to see if there are any additional state filing or notification requirements. And of course, be sure to keep your accountant in the loop!

One note of caution is that once you terminate S status, you generally cannot re-elect S status for 5 years. So before you make the change, be sure to consult with your legal, tax, and financial advisors to be sure that this is the right move for the company and its shareholders.