Revoking your S corp election converts the business into a C corporation for federal tax purposes. The mechanics are straightforward: shareholders holding more than half of the outstanding stock sign a written consent, the corporation files a revocation statement with its IRS service center, and the change takes effect on a date determined by when you file. The consequences are heavier than the paperwork suggests. The entity starts paying corporate income tax at 21%, shareholders lose the qualified business income deduction, distributions of future profits are taxed twice, and the corporation cannot re-elect S status for five years.
How to File the Revocation
A voluntary revocation is a written statement filed with the IRS service center where the corporation files its annual return. Shareholders holding more than half of all issued and outstanding shares, counting both voting and non-voting stock, must consent to the revocation in writing and sign under penalties of perjury.1Internal Revenue Service. Revoking a Subchapter S Election A flat 50% is not enough. You need a majority.
Minority shareholders who oppose the revocation have no veto once the majority threshold is met, and federal law does not require the corporation to notify the dissenting shareholders. State corporate governance rules may impose separate notice requirements, so check your state’s statute before filing.
When the Revocation Takes Effect
The filing date drives the effective date. The Code sets out three scenarios:2Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination
- File by the 15th day of the third month of the tax year, and the revocation is retroactive to the first day of that year. For a calendar-year corporation, filing by March 15 makes the revocation effective January 1.
- File later than that with no specified date, and the revocation takes effect on the first day of the following tax year.
- File with a specified prospective date, and the revocation takes effect on the date you choose, as long as that date is on or after the filing date.
Choosing a mid-year effective date creates what the Code calls an S termination year, split into a short S period and a short C period. The corporation then files two returns for the year: a final Form 1120-S covering the S period and a Form 1120 covering the C period. Income and deductions are generally allocated between the two periods on a daily pro-rata basis. If a 50% or greater ownership change occurs during the year, the corporation can elect to allocate using its actual books and records instead.2Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination
If the revocation is effective on the first day of the tax year, no split occurs. The corporation files a full-year Form 1120 instead of Form 1120-S.
What Changes Once You’re a C Corporation
An S corporation itself pays no federal income tax. Income flows through to shareholders, who report it on their individual returns and may claim a deduction of up to 20% of qualified business income under Section 199A. After revocation, that structure is gone.
The corporation pays federal income tax at the flat 21% rate on its taxable income.2Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination When the corporation later distributes after-tax profits, shareholders owe tax again on the dividends. This double layer of tax is the core economic cost of C corporation status and the reason most small businesses elected S in the first place.
The qualified business income deduction disappears with the S election. Dividends paid by a C corporation do not count as qualified business income.3Internal Revenue Service. Qualified Business Income Deduction For shareholders who were claiming the full 20%, the effective tax increase from revocation runs well beyond the corporate rate alone.
One item that does not trigger a tax on the way out: LIFO inventory. The LIFO recapture rule applies in the opposite direction, when a C corporation elects S status, not when an S corporation revokes.4Office of the Law Revision Counsel. 26 USC 1363 – Effect of Election on Corporation
Getting Cash Out During the Post-Termination Transition Period
After the S election ends, the corporation has a limited window called the post-termination transition period (PTTP) to distribute previously taxed earnings without dividend treatment. During the PTTP, the corporation can distribute cash from its Accumulated Adjustments Account (AAA) tax-free, up to each shareholder’s stock basis. The AAA tracks the S corporation’s previously taxed but undistributed earnings, and the PTTP is the last clean chance to move that money to shareholders.
The PTTP runs from the day after the last day of the final S corporation tax year until the later of one year after that date or the due date, including extensions, of the final S corporation return.5Office of the Law Revision Counsel. 26 USC 1377 – Definitions and Special Rule Distributions during the PTTP must be in cash to qualify. Any AAA left undistributed when the PTTP closes generally loses its favorable character, and future distributions come out of earnings and profits as taxable dividends.
There is one carve-out. A corporation that revoked its S election after December 21, 2017 may qualify as an eligible terminated S corporation under Section 1371(f). If it does, cash distributions made after the PTTP are sourced from AAA and earnings and profits on a pro-rata basis rather than exclusively from earnings and profits. That preserves some of the AAA benefit past the window, but it does not eliminate dividend taxation on the earnings-and-profits share.
Filing the Short-Year Returns
When revocation creates two short tax years, each carries its own filing obligation. The final Form 1120-S for the short S year is due by the 15th day of the third month after that short year ends. The Form 1120 for the short C year is due by the 15th day of the fourth month after that short year ends.6Internal Revenue Service. Publication 509 (2026), Tax Calendars Both returns are eligible for automatic six-month extensions using Form 7004.
The corporation must also issue each shareholder a Schedule K-1 for the short S year by the same date the final Form 1120-S is due. Shareholders need those K-1s to file their own returns, and per-schedule penalties apply for late issuance.
The Five-Year Wait Before You Can Re-Elect
Revocation is not something you can easily undo. After an S election is revoked or terminated, the corporation and any successor entity cannot re-elect S status until the fifth tax year beginning after the first year the termination was effective.2Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination A corporation that revokes effective January 1, 2026 cannot re-elect until the tax year beginning January 1, 2031. The rule applies whether the termination was voluntary or involuntary.
A corporation that does re-elect after the wait faces a further consequence. Any net unrealized gain in the corporation’s assets at the time of re-election is subject to the built-in gains tax under Section 1374 at the highest corporate rate, currently 21%, if the asset is sold within a five-year recognition period.7Office of the Law Revision Counsel. 26 US Code 1374 – Tax Imposed on Certain Built-in Gains Assets that appreciated during the C corporation years are the primary targets of that tax.
The IRS can waive the five-year waiting period, but only through a private letter ruling. The corporation must show that the original revocation or termination resulted from circumstances not within the control of the entity or its major shareholders, and a significant change in ownership since the termination can weigh in favor of relief. Private letter rulings are expensive. For requests received after January 29, 2026, the IRS user fee is $14,500 if the request is treated as one for relief under the regulatory provisions governing late or missed elections, or $43,700 if it falls under the general letter ruling category.8Internal Revenue Service. Internal Revenue Bulletin 2026-01 Professional representation adds thousands more, and the IRS is under no obligation to grant the request.
One narrow escape exists for involuntary terminations, such as an accidental transfer to an ineligible shareholder. The corporation can request inadvertent termination relief and be treated as if it never lost S status, provided the problem is corrected within a reasonable time and all affected shareholders agree to any required adjustments.2Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination Inadvertent termination relief is not available for voluntary revocations. Once the majority signs and the statement is filed, the five-year clock starts.