Why Convert Your Tax Status from S-Corp to C-Corp

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Why Convert Your Tax Status from S-Corp to C-Corp

The most common change in taxation status is from a C corporation (usually a General Corporation) to an S corporation in order to allow for pass-through taxation of income or loss. This is typically done to avoid double taxation of corporate income.

why convert your status from s corp to c corp

However, business owners do sometimes want to convert their tax status from an S corporation to a C corporation, usually because their companies no longer meet the requirements outlined by the IRS to be considered an S corporation.

The following requirements must be met in order to retain S corporation tax status:

  • Must file IRS Form 2553 in a timely manner
  • Approval of all shareholders of the corporation
  • Limited to no more than 100 shareholders
  • Shareholders cannot be non-resident aliens
  • Shareholders cannot be other S corporations
  • Cannot have more than one class of stock

 

If any of these requirements are not met, you must convert the tax status of the corporation. For example, you would need to change your corporation’s tax status if you want to increase your company’s number of shareholders with the goal of receiving additional funding or if you’d like to bring on foreign investors.

Another reason to change the tax status is if your corporation would like to accumulate income without the shareholders being taxed on their portion of the retained income. If your company is a C corporation, the shareholders are only taxed on the dividends they receive.

If the corporation violates any of the S corporation requirements, the IRS can automatically terminate a company’s S tax status.

How to Convert Your Tax Status from S-Corp to C-Corp

The IRS does not offer a standard form for changing your company’s tax status from S corporation to C corporation. Instead, it simply requires a written statement be filed with the appropriate IRS service center, along with a consent signed by a majority of your corporation’s shareholders (more than 50%).

The written statement can specify a date as long as it is not prior to the filing of the actual tax status reversal. If no specific date is listed, the filing becomes effective during the current tax year as long as the revocation is filed by the fifteenth (15) day of the third month of the current tax year. If it is filed after that date, it becomes effective as of the first day of the following tax year.

Before making any changes to your corporation’s tax status, it is best to consult a tax professional, as tax professionals are experts in this area and thus best suited to advise on tax status matters.  

 

Sources:

“When is the Best Time to Switch from an S Corp to a C Corp?”

“Can I Change My Business From an S Corporation to a C Corporation?”

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