S-CORP TO C-CORP
Why Convert from a C Corporation to an S Corporation? W W W. ACCO UN T IN G A ND R EFUND S .CO M
KNOWING THE DIFFERENCE S corporations are called “pass-through” entities because income passes through the entity for taxation purposes and is claimed on the owner`s income tax return. Under the TCJA, some passthrough business owners can claim a deduction of up to 20% of qualified business income (QBI) on their tax return. In addition, owners of a passthrough can also directly deduct net operating losses on their personal income tax return, using them to offset other personal income.
STATE & FEDERAL REQUIREMENTS FOR CONVERTING A C CORPORATION TO AN S CORPORATION The first order of business is to be sure that your C corporation is eligible to be converted to an S corporation. An S corporation may have only a limited number of shareholders (generally 100 or less). The corporation may have only one class of stock, and all shareholders must be either U.S. citizens or lawful permanent residents. If your C corporation is eligible for S corporation status, you must complete IRS Form 2553. In addition, there is a specific time frame in which the conversion must take place. A filing
There are potential tax implications of converting from a C corporation to an S corporation, notably the Built-In Gains (BIG) tax. To determine BIG tax, the corporation must determine the amount of unrealized gain for each asset at the time of conversion to an S corporation.
is considered timely if it is made no more than two months
Despite the prospect of BIG tax, S corporation status still offers clear advantages for many corporations. So how do you convert your C corporation to an S corporation if it makes sense for your business?
Filing a late election as an S-corp can have profound financial
and fifteen days after the beginning of the tax year in which the election of S corporation status is to take effect. A late election can be made by attaching Form 2553 to Form 1120S to your annual tax return for the S Corporation.
implications. The corporation will continue to be taxed as C-corp. You may get penalties from the IRS for late filings and payments and be fined for unpaid taxes. Additionally, if a business files a tax return as an S-corp using Form 1120S, documents from the previous tax year are considered public and are subject to an IRS audit.