Consent
of more than 50% of the shareholders is required to terminate Subchapter S
corporation status. To revoke the election, the IRS requires (1) a
statement from the Subchapter S
corporation, and (2) a statement from the shareholders
that consent to the election.
—Subchapter S Corporation statement should include:
• Declaration that the corporation is
revoking its election to be treated as a Subchapter S
corporation under §1362(a) of
the Internal Revenue Code.
• Name, address, taxpayer identification number of the Subchapter S
corporation.
• Number of shares of stock outstanding at the time of revocation.
• Date the revocation is to be effective.
• Signature of officer authorized to sign Form 1120S.
—Subchapter S Corporation Shareholders’ statement should
include:
• Name, address, and taxpayer
identification number of each shareholder consenting to the termination.
• Number of shares the shareholder owns at the time the revocation is
made.
• Date or dates the Subchapter S
corporation stock was acquired.
• Date the shareholder’s tax year ends.
• Name and taxpayer identification number of the Subchapter S
corporation to which
the election applies.
• Shareholder’s signature with a statement that the document was
signed under penalties of perjury.
Waiting Period: There is a five-year
waiting period before the corporation can again become a Subchapter S
corporation
unless the IRS grants permission. Permission is rarely given unless the
corporation has had a greater than 50% change in ownership.
Termination Date: If the termination
date is not on the first day of the tax year, the Subchapter S
corporation must file
two short-year returns: (1) Form 1120S, U.S. Income Tax Return for an S
Corporation, and (2) Form 1120, U.S. Corporation Income Tax Return.
Two Short Tax Years
If a Subchapter S
corporation voluntarily revokes S
status, it can choose to have the termination effective the first day of
the next tax year. This will avoid creation of two short years. If a
termination creates two short years, income and loss is generally
allocated between the two years based in the number of days in each [IRC
§1362(e)(2)]. However, if all shareholders agree, a
Making the Election: Attach a
statement to the C corporation tax return for the short tax year that
follows termination of the Subchapter S
corporation election.
The statement must contain:
1) Corporation’s name, address, and EIN.
2) Statement that the corporation elects to close the corporate books
under IRC §1362(e)(3).
3) Date of Subchapter S
corporation termination and the reason for termination.
4) Names, addresses, taxpayer identification numbers, number of shares
owned and dates acquired for all shareholders who owned Subchapter S
corporation
stock during the year; and the same shareholder information for all
shareholders who owned stock at the beginning of the C corporation’s
short year.
5) Signature of all shareholders indicating consent to not have the
provisions of IRC §1362(e)(2) apply.
