Why to Revoke An S Election and How to Do It – Internal Revenue Code Section 1362(d); Reg § 1.1362­6(a)

Many entrepreneurs get caught up in selecting the “most appropriate business structure” – particularly people planning to conquer the moon right out of the gate. If this is you beware as business structure is a determination that is best driven out of operational efficacy. Why?

Most all new businesses fail, it is a fact of life. Properly closing down a failed operation is a hard thing to do. It can be expensive and full of landmines as it were, complicated all the more by the S election.

Allowing your business to financially thrive before getting wrapped up in business structure is the absolute safest way to proceed in the long run even if it may cost a little more in terms of taxation up front.

In the continuum of possible mistakes that WILL UNDOUBTEDLY BE MADE most people are best served erring towards a basic structure to start, be it a sole proprietorship or even a single member LLC.

Proceeding deliberately and conservatively allows your operation the opportunity to indeed demonstrate its capacity to flourish financially and otherwise in advance of making decisions about future business structure.

Whatever you do resist the urge to buy “business structure” snake oil by some green around the gills 20 something attorney straight out of law school that just, perhaps barely, passed his or her Bar exam as they are all a dime a dozen that will pitch you on “carefully selecting” business structure from operational inception.

In an effort to “show you” how to control self employment tax liability, some of these ninnies go one step further and elect for you to be treated as an S Corporation for income tax purposes by filing IRS Form 2553 thinking that the S election is some sort of panacea to minimizing overall tax liabilities.

In fact many people elect this status only to find out later that they lack both the support network and the financial resources to stay compliant with both their quarterly federal employment tax filing and payment obligations via IRS Form 941 and their annual federal unemployment tax obligations via IRS Form 940.

Also many business owners don’t realize that there may be cumbersome state tax obligations as well.

Here in Colorado for example generally speaking as an owner of an S-corporation you must treat yourself as an employee for Colorado unemployment tax obligations, that means registering with the Colorado Department of Labor and Employment and establishing a MyUI Account.

In other words prematurely selecting S Status means your profits might be eaten up with the penalties administered for failing to stay compliant with the administrative burden of filing the right tax forms in a timely fashion. That is why many people are best advised to make sure they know when the time is most appropriate to take the fullest advantage of the S Election.

Many people are guided inappropriately into prematurely electing S status when they are not ready for it and candidly this can be the kiss of death. If you have found yourself burdened by all the filing obligations associated with the S election and would prefer to simply rescind the election this is how you do it.

  • The revocation of an S corporation election requires the consent of shareholders who, at the time of the revocation, hold more than 1/2 of the number of issued and outstanding shares of stock (including non ­voting stock) of the corporation.
  • Each consent should indicate the number of issued and outstanding shares of stock (including non ­voting stock) held by each shareholder at the time of the revocation.
  • The revocation is made by filing a statement with the IRS Service Center where the election was properly filed stating that the corporation revokes the election made under Code Sec. 1362(a) Code Sec. 1362(a).
  • Also check out the Regulation regarding elections and consents

The statement must:

  • identify the election being made,
  • set forth the name, address, and taxpayer identification number of the corporation,
  • set forth the date the revocation is to be effective, for revocations that specify a prospective date,
  • be signed by a person authorized to sign an annual S corporation return, and
  • include the number of shares of stock (including non ­voting stock) issued and outstanding at the time the revocation is made.

If no date is specified the revocation is effective:

  • for the tax year in which it is made, if made on or before the 15th day of the third month of that year; or
  • for the tax year after the tax year in which it is made, if made after the 15th day of the third month.

If the revocation specifies that it is to be effective on the date that is on or after the date that it ismade, it will be effective on that date, even if it causes the corporation’s tax year to be split as per Code Sec. 1362(d); Reg § 1.1362­6(a)Reg § 1.1362­6(a);

Sample Statement of revocation of election to be an S corporation:

Taxpayer Advocacy Services, Inc. 6XXX S. Macon Way, Englewood, CO 80111 EIN 12â€1231231 May 12, 20XX

Taxpayer Advocacy Services, Inc. hereby revokes the election it had made under Code Sec. 1362(a) to be an S corporation. The revocation is to take effect on July 1, 20XX. At the time this revocation is made, Taxpayer Advocacy Services, Inc has issued and outstanding 7000 shares of stock (including non voting stock). Attached to this statement of revocation are statements of consent to the revocation signed by holders of a majority of the issued and outstanding shares of stock (including non voting stock) of the corporation as of the time this revocation is made.

Taxpayer Advocacy Services, Inc. _____________________________ John R. Dundon II, EA, President