Revoking an S-Corp Election: How It Works and What It Costs

Almost everything written about S-Corps is about electing. Very little is about the other direction, which is unfortunate, because a fair number of businesses elect too early and then need to know what their options are.

The election can be revoked. It is not difficult. It is also not free, and it is not quickly reversible — which is the strongest argument for not electing prematurely in the first place.

The usual case is a business whose profit has fallen. The S-Corp election is only worth having above the level of profit where the payroll tax saving exceeds the cost of payroll and a second return. A business that elected at one level of profit and now operates at a lower one may be paying for a structure that no longer earns its keep.

Other reasons are structural rather than arithmetic: bringing in an investor the S-Corp rules do not permit, a shareholder becoming a non-resident, a need for multiple classes of stock, or a planned sale where a different structure suits the buyer.

What is usually not a good reason is finding the compliance tiresome. The obligations are the price of the saving, and if the saving is still there, the answer is normally to outsource the compliance rather than give up the benefit.

Revocation requires the consent of shareholders holding more than 50% of the shares, counting both voting and non-voting stock. In a single-shareholder company that is a formality. In a company with partners it is a conversation, and it should be a documented one.

The revocation itself is a written statement filed with the IRS. There is no dedicated form. The statement identifies the corporation, states that it is revoking its election under the relevant provision, and is accompanied by the shareholder consents.

It should also be sent in a way that produces proof of mailing. A revocation the IRS has no record of is the kind of problem that surfaces a year later.

If the revocation is filed by the fifteenth day of the third month of the tax year, it takes effect from the first day of that year. Filed after that, it takes effect from the first day of the following tax year — unless a specific prospective date is stated in the statement.

You can name a future effective date, which is often the cleaner route: it avoids a mid-year split and lets payroll and books close on a normal year boundary.

If the effective date does fall mid-year, the corporation ends up with a short S-Corp year and a short C-Corp year, each needing its own return. That is more work and more cost, and it is worth planning around rather than into.

This is the part that makes revocation a decision rather than an experiment.

Once an S election has been revoked or terminated, the corporation generally cannot elect S status again for five tax years without IRS consent. Consent can be requested and is sometimes given, but it is not a formality and it is not something to count on.

So a business that revokes in a lean year and recovers two years later may find it cannot elect again for another three. The cost of revoking is not the filing — it is the option you give up.

This cuts both ways as advice. It is a reason to think carefully before revoking, and an equally strong reason not to elect before the profit clearly supports it. Running the numbers first, through the S-Corp savings calculator, is cheaper than either mistake.

Revoking the S election does not dissolve the company or change what it is under state law. An LLC that had elected S-Corp treatment is still an LLC; a corporation is still a corporation.

What changes is the federal tax treatment. Without the S election, a corporation is taxed as a C-Corp — a separate taxpayer, with its own tax on profit and the prospect of a second layer when profit is distributed. An LLC that revokes may revert to being taxed as a partnership or a disregarded entity, depending on its membership.

That distinction matters enormously and is the reason revocation should not be filed without working through what the entity becomes. Ending up as a C-Corp by accident is a worse outcome than the S-Corp costs you were trying to escape.

Revocation is a reasonable answer to a business that has genuinely changed. It is an expensive answer to a bad month.