To convert an S corp to a C corp, you revoke the S election by filing a signed statement with the IRS service center where the corporation files its annual return. There is no IRS form for this; the revocation is a letter-format statement, and it requires consent from shareholders holding more than 50 percent of the corporation’s issued and outstanding shares, counting both voting and non-voting stock.1Office of the Law Revision Counsel. 26 US Code 1362 – Election; Revocation; Termination The paperwork is straightforward. The tax consequences that follow are not.
How to File the Revocation Statement
Your company is already a corporation. It just happens to have an S election in place. To become a C corporation, you revoke that election by sending a statement to the same IRS service center that receives your annual return.2Internal Revenue Service. Revoking a Subchapter S Election
The revocation statement must include:
- The corporation’s name, EIN, and a declaration that it is revoking its election under Section 1362(a)
- Each consenting shareholder’s name, address, taxpayer identification number, number of shares owned, and the date those shares were acquired
- The date the revocation should take effect
- The signature of a person authorized to sign the corporate tax return
Each consenting shareholder signs under penalties of perjury. The most common failure point is not the letter itself but the consents: if you don’t collect signed consents from shareholders holding more than half the stock, the IRS won’t process the revocation. Start gathering signatures well before your target effective date.2Internal Revenue Service. Revoking a Subchapter S Election
Choosing the Effective Date
When your revocation takes effect controls how the tax year splits. For a calendar-year corporation, three scenarios apply:1Office of the Law Revision Counsel. 26 US Code 1362 – Election; Revocation; Termination
- Filed on or before March 15, with no date specified: effective January 1 of that same year. The entire year is a C corporation year.
- Filed after March 15, with no date specified: effective January 1 of the following year. You operate as an S corporation for the rest of the current year.
- Filed with a specific prospective date: effective on that date, as long as the date falls on or after the day the revocation is filed.
A mid-year effective date creates two short tax years. The corporation files a final short-year Form 1120-S for the S corporation period and a short-year Form 1120 for the C corporation period.3Internal Revenue Service. Instructions for Form 1120-S (2025) The short-year S return is due by the due date of the C corporation short-year return, including extensions, and income and deductions between the two periods are allocated under Section 1362(e). Picking a clean year-end effective date avoids the split-year allocation work entirely.
Handle the State Filing Separately
Revoking with the IRS changes your federal tax classification only. Most states require separate notification. Some conform automatically to the federal election; others require articles of amendment, a certificate of conversion, or a state-level tax election filed with the Secretary of State or department of revenue. State filing fees for conversion-related documents typically run from $25 to $300, and some states impose their own effective-date rules that may not align with the federal revocation date. If you’re registered in multiple states, expect to file in each.
Distribute AAA During the Post-Termination Transition Period
The single most valuable and most missed step in a conversion is distributing the accumulated adjustments account during the post-termination transition period, or PTTP. The AAA tracks income that was already taxed to shareholders during the S corporation years but never distributed as cash. Without action, that money gets trapped inside the new C corporation and taxed a second time when it eventually comes out as a dividend.
The PTTP is a roughly one-year window during which cash distributions from AAA reduce a shareholder’s stock basis rather than being treated as C corporation dividends.4eCFR. 26 CFR 1.1377-2 – Post-Termination Transition Period It begins the day after the last day of the final S corporation tax year and generally runs until the later of one year after that date or the due date, with extensions, for filing the final S corporation return.
If the corporation has a meaningful AAA balance, plan the distribution before the conversion, not after. Once the window closes, those dollars are treated like any other C corporation distribution, subject to dividend taxation if the corporation has earnings and profits.
What Changes After Conversion
The shift from pass-through to corporate-level taxation is the biggest financial change. The C corporation pays a flat 21 percent federal income tax on its profits.5GovInfo. 26 USC 11 – Tax Imposed Shareholders then pay tax again when the after-tax profits come out as dividends, the double taxation that defines C corporation life.6Internal Revenue Service. Forming a Corporation Qualified dividends are generally taxed at 0, 15, or 20 percent depending on the shareholder’s income; nonqualified dividends are taxed at ordinary rates.7Congressional Budget Office. Raise the Tax Rates on Long-Term Capital Gains and Qualified Dividends by 2 Percentage Points For shareholders in the top bracket, the combined effective rate on distributed profits can exceed 39 percent before state taxes.
Quarterly estimated tax payments become the corporation’s responsibility. For a calendar-year C corporation, installments are due April 15, June 15, September 15, and December 15.8Internal Revenue Service. Publication 509 (2026), Tax Calendars Missing them triggers underpayment penalties. S corporations rarely deal with entity-level estimated payments, so this catches many converted businesses off guard.
Losses stop flowing through. Under S corporation status, losses passed through to shareholders and could offset personal income. As a C corporation, losses stay at the entity level. They carry forward against future corporate income, but shareholders cannot use them on personal returns. If you expect losses in the near term, this change alone can make conversion painful.
The return itself changes from Form 1120-S to Form 1120,9Internal Revenue Service. About Form 1120, US Corporation Income Tax Return and the corporation must start tracking an earnings and profits account to classify distributions as dividends, returns of capital, or capital gains. State corporate income tax returns change as well; state corporate rates run from zero in a handful of states to over 11 percent depending on where the corporation operates.
Accounting Method
If your S corporation used the cash method, the conversion may force a switch to accrual. C corporations generally must use the accrual method unless their average annual gross receipts over the prior three years fall below an inflation-adjusted threshold, which is $31 million for 2025.10Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense Smaller C corporations under the threshold can often stay on the cash method.
Changing methods creates a Section 481(a) adjustment for the difference between income under the old and new methods. A positive adjustment, meaning more tax owed, is generally spread over four years; a negative adjustment is taken entirely in the year of the change.11Office of the Law Revision Counsel. 26 US Code 481 – Adjustments Required by Changes in Method of Accounting For companies with significant accounts receivable that went unreported on the cash method, the additional taxable income can still be substantial.
Qualified Small Business Stock
Section 1202 is available only to C corporation shareholders and is one of the reasons owners convert. A shareholder who holds qualified small business stock for more than five years can exclude up to 100 percent of the gain on sale, up to the greater of $10 million or ten times the shareholder’s adjusted basis.12Office of the Law Revision Counsel. 26 US Code 1202 – Partial Exclusion for Gain From Certain Small Business Stock
To qualify, the stock must be issued by a domestic C corporation whose aggregate gross assets have never exceeded the statutory threshold at the time of issuance, the shareholder must acquire the stock at original issuance for cash, property, or services, and during substantially all of the holding period the corporation must be an active business rather than a holding company, professional services firm, or financial institution.12Office of the Law Revision Counsel. 26 US Code 1202 – Partial Exclusion for Gain From Certain Small Business Stock
One critical detail for converting corporations: the five-year holding clock generally starts when the stock is issued by a C corporation. Time held during the S corporation years doesn’t count toward Section 1202. If QSBS is driving the conversion, the payoff is at least five years out.
The Decision Is a Five-Year Commitment
Once the S election is terminated, the corporation cannot re-elect S status for five taxable years unless the IRS grants consent, which is rare and generally requires showing that the termination was inadvertent or that circumstances have materially changed.13Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination Any successor corporation faces the same restriction. Before you send the revocation letter, model the corporate-level tax hit, plan the AAA distributions during the PTTP, and confirm that the reasons for converting will still hold five years from now.