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If the business filed Form 2553 Election by a Small Business Corporation, the business would have to revoke (or terminate) this election for it to no longer be effective (once the IRS approves the revocation). A business should continue filing as an S Corporation until a termination of the election is made and approved by the IRS.

Per IRS Instructions for Form 1120-S U.S. Income Tax Return for an S Corporation, on page 2:

Termination of Election

Once the election is made, it stays in effect until it is terminated. If the election is terminated, the corporation (or a successor corporation) can make another election on Form 2553 only with IRS consent for any tax year before the fifth tax year after the first tax year in which the termination took effect. See Regulations section 1.1362-5 for details.

An election terminates automatically in any of the following cases.

  1. The corporation is no longer a small business corporation as defined in section 1361(b). This kind of termination of an election is effective as of the day the corporation no longer meets the definition of a small business corporation. Attach to Form 1120-S for the final year of the S corporation a statement notifying the IRS of the termination and the date it occurred.
  2. The corporation, for each of 3 consecutive tax years (a) has accumulated earnings and profits, and (b) derives more than 25% of its gross receipts from passive investment income as defined in section 1362(d)(3)(C). The election terminates on the first day of the first tax year beginning after the third consecutive tax year. The corporation must pay a tax for each year it has excess net passive income. See the line 22a instructions for details on how to figure the tax.
  3. The election is revoked. An election can be revoked only with the consent of shareholders who, at the time the revocation is made, hold more than 50% if the number of issued and outstanding shares of stock (including nonvoting stock). The revocation can specify an effective revocation date that is on or after the day the revocation is filed. If no date is specified, the revocation is effective at the start of the tax year if the revocation is made on or before the 15th day of the 3rd month of that tax year. If no date is specified and the revocation is made after the 15th day of the 3rd month of the tax year, the revocation is effective at the start of the next tax year.

When to File

If the S corporation election was terminated during the tax year and the corporation reverts to a C corporation, file Form 1120-S for the S corporation's short year by the due date (including extensions) of the C corporation's short year return.

Note. You may file a fiscal year or short year return using the TaxAct® 1120-S program. The IRS allows e-filing of short-year returns if it is the corporation's first year or final year; otherwise, a paper return must be filed instead.

Related Links

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