How to Revoke Your S-Corp Status

What does it mean to revoke S-Corp status?

Revoking S-Corp status means voluntarily or involuntarily terminating your company's S-Corp election and reverting to a previous entity structure, like LLC or C-Corporation. When you revoke, you're changing how the IRS taxes your business.

Think of it like switching phone plans. You're keeping the same phone (your business entity), but you're changing the service agreement (your tax treatment).

However, there's a catch! When you make an S-Corp election with Form 2553, 2 things happen:

1. The LLC is deemed to be a corporation
2. S-Corp status is elected

That means that when you revoke your S-Corp election, your business doesn't automatically flip back to an LLC. It generally becomes taxed as a C-Corporation unless you separately change your entity classification (typically with Form 8832).

Keeper pro tip: Many business owners don't realize that an LLC and an S-Corp are not mutually exclusive. You can be an LLC that elected S-Corp taxation. When you revoke, you're simply ending the S-Corp tax election and going back to default LLC taxation.

Common reasons to revoke your S-Corp status

1. Planning to sell your business

C-Corporations often get higher valuations from buyers, especially private equity firms and strategic acquirers who prefer the C-Corp structure. If you're preparing for a sale within 1-2 years, converting back to C-Corp status might make your company more attractive.

2. Need to raise capital from investors

S-Corps have strict ownership restrictions. You can't have more than 100 shareholders, and they must be U.S. citizens or residents. C-Corps have no such limits, making them ideal for venture capital funding.

Keeper pro tip: If you're even considering institutional funding down the road, it's often easier to convert to C-Corp status before approaching investors rather than scrambling to convert during negotiations.

3. Want to retain earnings in the business

S-Corp income passes through to owners personally, meaning you pay tax on profits whether you take the cash out or not. C-Corps allow you to keep profits in the business and reinvest them, which can be advantageous if you're in a high tax bracket personally but the business is in a lower one.

Example: Marcus's S-Corp made $500,000 in profit. He wants to reinvest all of it into equipment and expansion, but he personally owes about $150,000 in taxes on that income. As a C-Corp, the company would pay corporate tax (currently 21% federal), and Marcus would only pay personal tax when he actually takes distributions.

4. Violated S-Corp requirements

Sometimes revocation isn't voluntary. If you unknowingly broke S-Corp rules (like issuing shares to a foreign investor or exceeding 100 shareholders), your S-Corp status terminates automatically. In these cases, you might choose to formally revoke rather than deal with an involuntary termination.

5. The tax math changed

S-Corp status makes sense when there's a meaningful gap between your total income and reasonable salary. We recommend considering electing as an S-Corp when your net profit reaches >$60K. But if your business income dropped, or if you need to take most profits as salary anyway, you're doing all the S-Corp paperwork for minimal tax benefit.

6. You want the simplicity of an LLC back

Many LLC owners elected S-Corp status to save on self-employment taxes, but the administrative burden became overwhelming. Reverting to LLC status means:

• No more corporate formalities (annual meetings, minutes, resolutions)
• No more S-Corp payroll requirements
• Simpler tax filing (Schedule C or Form 1065 instead of Form 1120-S)
• More flexibility in profit distributions

Let's take Jennifer as an example. She runs a freelance marketing business as an LLC that elected S-Corp status. She's tired of running payroll for just herself, maintaining corporate records, and paying her CPA $4,200/year for S-Corp compliance. Her self-employment tax savings are only about $3,000/year, so the juice isn't worth the squeeze. She revokes to go back to simple Schedule C reporting.

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How to revoke S-Corp status

Step 1: Get shareholder approval

You need consent from shareholders holding more than 50% of the outstanding shares. This isn't 50% of voting power - it's 50% of total shares, including non-voting shares. Make sure to document this approval meticulously. A simple corporate resolution signed by all shareholders providing consent is your best protection. Include the date, vote count, and explicit language about revoking the S-Corp election.

Step 2: File the revocation statement with the IRS

You'll submit a formal revocation statement to the IRS service center where you filed your original S-Corp election. Your statement must include:

• Company name, address, and EIN
• A clear declaration: "The corporation revokes the election made under Section 1362(a)"
• Tax year when revocation should take effect
• Shareholder consent documentation (signatures representing more than 50% ownership)

Note: There's no official IRS form for this. You're literally writing a letter or statement.

Then, mail it to the same IRS service center where your original Form 2553 was filed. Check the current IRS instructions for the correct address based on your location.

Step 3: Choose your effective date

If a revocation is made during the tax year and on/before the 15th day of the 3rd month, it is generally effective on the 1st day of that same tax year.

• Filing by March 15 without specifying you want it effective for the current year → Effective next January 1 (default)
• Filing by March 15 and stating you want current year → Effective January 1 of current year
• Filing after March 15 → Effective next January 1

Step 4: Update your records

For LLCs:

• Amend your operating agreement to remove S-Corp election references
• Update any language about distributions and compensation
• If you have a board or management structure, you can simplify it now
• Notify your registered agent of the tax status change
• Cancel payroll services if you no longer need them (you may still need payroll for non-owner employees)

For corporations:

• Amend bylaws if they reference S-Corp status
• Notify your registered agent (if applicable)
• Update shareholder agreements
• Inform your payroll provider (different tax treatment may apply)

Step 5: File the appropriate tax returns

Your final S-Corp return (Form 1120-S) covers through your last day as an S-Corp.

• If you're reverting to a single-member LLC: Begin reporting on Schedule C with your Form 1040
• If you're reverting to a multi-member LLC: File Form 1065 (partnership return) and issue K-1s to members
  
• If you're reverting to a C-Corp: File Form 1120

Keeper pro tip: If you're doing a mid-year revocation, work closely with your accountant on the allocation methods. The IRS allows either daily proration or an interim closing of the books. The latter is more accurate but requires more work.

The 5-year waiting period

Here's the catch: Once you revoke your S-Corp election, you generally cannot re-elect S-Corp status for five years without IRS permission. This is a major commitment.

Can you get around the 5-year rule?

Yes, but it's difficult. You must request IRS consent by filing a private letter ruling, which costs $43,700 (as of 2026) and takes months. The IRS will only approve if you can demonstrate that:

• More than 50% of the stock is owned by people who didn't own stock when the revocation occurred, OR
• The revocation wasn't done to avoid taxes, and there's a legitimate business purpose for re-electing

Tax implications to consider

Built-in gains tax trap

If your S-Corp previously converted from C-Corp status and you have gains from that conversion, revoking creates a tax trap. Any remaining built-in gains that were subject to the period get locked in at C-Corp rates. That simply means that assets that appreciated while you were a C-Corp (before becoming an S-Corp) might face double taxation if sold after revoking back to C-Corp status.

Accumulated Adjustments Account (AAA)

Your S-Corp likely has an AAA balance, which is essentially a record of earnings that have already been taxed at the shareholder level. When you revoke:

• The AAA freezes at the moment of revocation
• You can distribute that AAA to shareholders tax-free during a one-year post-termination transition period
• After that year, the money becomes taxable as dividends under C-Corp rules

Keeper pro tip: If you have significant AAA balance, distribute it to shareholders within that one-year window to avoid double taxation. This requires careful planning because you'll need actual cash to make the distributions.

Reasonable compensation rules flip

As an S-Corp, you needed to pay yourself reasonable W-2 wages to avoid IRS scrutiny. As a C-Corp, you face the opposite pressure: the IRS may challenge compensation that's too high as disguised dividends (which aren't tax-deductible to the corporation).

Voluntary vs. involuntary revocation

Voluntary revocation is when you proactively choose to end S-Corp status by filing the revocation statement. You control timing and can plan accordingly.

Involuntary revocation is when your S-corp status ends automatically when you violate eligibility requirements like:

• Exceeding 100 shareholders
• Adding an ineligible shareholder (corporation, partnership, non-resident alien)
• Creating a second class of stock
• Deriving too much passive income (if you were previously a C-Corp)

Keeper pro tip: Involuntary termination happens on the date you violated the rules, not when the IRS discovers it. This can create nightmarish retroactive tax situations. If you discover you've violated S-Corp rules, immediately consult a tax professional about requesting relief or formally revoking. Need help? Your 1st tax pro consultation is free with Keeper.

State tax considerations

Don't forget your state! Some states don't recognize S-Corp status at all (looking at you, Tennessee and Texas), while others have their own rules:

• California: Charges a 1.5% S-Corp tax
• New York: Has its own S-Corp election separate from federal
• New Jersey: Requires filing for termination of S status at the state level

You may need to file separate revocation statements with your state tax authority. Make sure to check with your state's department of revenue.

Alternatives to full revocation

Before pulling the trigger, consider these options:

1. Creating a C-Corp subsidiary

Keep your S-Corp parent and create a C-Corp subsidiary for specific business lines, especially those that need to raise capital or have different ownership requirements.

Example: Your S-corp consulting firm wants to launch a software product that needs VC funding. Create a C-Corp subsidiary for the software business while maintaining S-Corp status for consulting.

2. Qualified Small Business Stock (QSBS) planning

If you're considering selling, C-Corp status might qualify you for QSBS treatment (Section 1202), which can exclude up to $10 million in capital gains from federal tax. This requires holding C-Corp stock for five years.

Keeper pro tip: Some entrepreneurs revoke S-Corp status specifically to start the QSBS clock ticking, even if they're not planning to sell for 5+ years.

3. Take higher distributions

If your main concern is retaining earnings, remember that S-Corp owners can choose not to distribute all profits. You'll pay tax on the income, but you can keep the cash in the business. Sometimes this is simpler than changing your tax status.

Common mistakes to avoid

Mistake #1: Forgetting about the AAA

Business owners often forget to distribute their AAA balance within the one-year post-termination period, resulting in unnecessary double taxation.

Mistake #2: Revoking during a high income year

If you revoke mid-year during your most profitable year, you create split-year complexity and potentially higher taxes. Plan the timing around lower-income periods if possible.

Mistake #3: Failing to consider your exit timeline

If you might sell within five years, think twice about revoking. The inability to re-elect S-Corp status could limit your options if circumstances change.

Mistake #4: Forgetting to adjust your estimated tax payments

If you revert to LLC status, your quarterly estimated tax burden changes significantly:

• ‍As an S-corp: Taxes are partially covered through W-2 withholding, and quarterly payments are made for the remaining income.‍
• As an LLC: All your tax liability is covered through quarterly estimated payments, since you no longer have payroll withholding.

If you miss your estimated payments after reverting, and you'll face penalties and a big tax bill come April.

Do you need professional help?

This isn't a DIY project for most business owners. Revoking S-corp status is a significant decision with long-term implications. The process itself is straightforward (getting shareholder consent and filing a revocation statement), but the tax consequences and strategic considerations are anything but simple.

Revocation involves:

• Complex tax planning
• Timing optimization
• State compliance issues
• Shareholder agreement review
• Multi-year tax projection modeling

When to work with a CPA:

• You have significant built-in gains or AAA balances
• You're planning a mid-year revocation
• You're considering re-election within five years
• You operate in multiple states
• Your business has complex ownership structures

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Do I need to file Form 8832 when I revoke my S-Corp election as an LLC?

Yes! This is a critical step many people miss. When you revoke S-Corp status, you're technically still classified as a corporation for tax purposes unless you file Form 8832 to revert to LLC default taxation. File Form 8832 along with your S-Corp revocation statement to ensure you actually return to disregarded entity (single-member) or partnership (multi-member) status. Without Form 8832, you'll accidentally become a C-Corp.

What happens to my S-Corp losses after revocation?

‍‍Unused S-Corp losses generally remain with shareholders and can be carried forward on their personal returns, subject to basis and other limitations. Check out our complete guide on S-Corp losses.

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