Q: I need to revoke S-Corp status for my LLC. How do I do that and what is the cost?
Thank you to a client in California for this great question! To revoke S-Corp status for your LLC, you’ll need to submit a statement of revocation to the IRS. If that sounds complicated, don’t worry—we’ll walk you through the process.
Oh, and by the way, you’ll be happy to know that filing for revocation of your S-Corp status is free.
What is S-Corp Status?
S-Corp status is a tax election that businesses like corporations and LLCs can choose to file their taxes under to receive certain tax benefits. For example, under your default tax status as an LLC owner, you’re subject to self-employment tax. But under S-Corp status, you’re not. As a result, LLCs with high earnings can save money on taxes with S-Corp status. There are a variety of advantages and disadvantages to choosing S-Corp vs LLC status.
Why Revoke S-Corp Status for My LLC?
There are many reasons an LLC may choose to revoke its S-Corp status.
For one, according to the IRS, your LLC must meet certain requirements to qualify as an S-Corp. For example, you must have no more than 100 members, and none of your members can be other business entities or non-resident aliens. However, as your business evolves, you may want to expand your membership beyond these restrictions and abandon your S-Corp status.
If you and your LLC no longer benefit from S-Corp status, revoking it may save you money. For example, reverting to your default tax election may help you pay less on taxes if your LLC’s taxable income has decreased.
How do I Revoke S-Corp Status for my LLC?
There are several steps you’ll need to take to revoke your S-Corp status:
Step 1: Approve S-Corp revocation within your LLC
First, you’ll need internal approval from the members of your LLC. You’ll have to call a meeting and vote on terminating your S-Corp status following the rules set out in your operating agreement. If the vote passes, you’re ready to move forward.
Step 2: Submit a statement of revocation to the IRS
The IRS provides specific guidelines for what information you must include in your statement of revocation. When looking over these guidelines, you may notice that the IRS refers to “shareholders.” As an LLC, you do not have shareholders, so you will use information about your members.
You must begin by stating that you revoke your S-Corp election made under Section 1326(a) of the federal law.
Then, you must provide the following information about your LLC:
- Names of your members
- Addresses of your members
- Taxpayer identification number of your members
- The amount of interest in the LLC each member owns
- The date (or dates) on which the interest was acquired
- The date on which your members’ taxable year ends
- The name of the S corporation
- The S corporation’s EIN
- The tax election your members will file under after revoking S-Corp status
- An indication of the effective date of the revocation
You must also include signatures from key members (be sure to identify these on your statement):
- Signatures from all members verifying the provided information under penalties of perjury
- The signature and consent of all members who collectively own more than 50% interest in the LLC
- The signature of the individual authorized to sign your tax return
Where do I send my S-Corp statement of revocation?
You’ll need to send your statement to the IRS Service Center you send your tax return to, which will depend on your state. You can find out which service center you need to use on page 3 of the IRS’ instructions for Form 2553 (the document you used to file for S-Corp status).
When do I send S-Corp my statement of revocation?
For your revocation to be effective for the first day of the current tax year, you must file by the 16th day of the third month of the tax year. Otherwise, you just have to make sure that IRS receives your statement of revocation by your requested effective date.
Can I Revert My LLC Back to S-Corp Status?
Yes. You can revert back as long as your LLC meets S-Corp requirements and at least five years have passed since your S-Corp revocation. (However, it is possible request a waiver from the IRS to revert sooner.)
When reverting, note that the IRS will only apply your S-Corp status to the current tax year if you apply within the first 2 months and 15 days of that tax year. Otherwise, your S-Corp status will be applied the following tax year.