IRS offers guidance on switching from S corp to C corp status

Register now

The Internal Revenue Service issued a revenue procedure Wednesday providing information on how companies can change their method of accounting if they have switched from being an S corporation to a C corporation in response to the Tax Cuts and Jobs Act.

Last December’s tax code overhaul slashed the top tax rate for C corporations from 35 to 21 percent, but also gave pass-through entities such as S corporations a 20 percent tax deduction, subject to limitations. The dramatic decrease in tax rates for C corporations is prompting many businesses structured as S corporations to consider changing into C corporations. To make the change, a business can revoke its S corporation election with the consent of a majority of its shareholders and become a C corp, though it will need unanimous consent if it wants to go back to S corp status.

Revenue Procedure 2018-44 modifies two revenue procedures from earlier this year to say that an eligible terminated S corporation that’s required to change from the overall cash method to an overall accrual method of accounting as a result of a revocation of its S corporation election, and that makes this method change for the C corporation’s first taxable year after the revocation, should take into account the resulting section 481(a) adjustment ratably during the six-year period starting with the year it makes the change.

The new revenue procedure also says an eligible terminated S corporation that’s allowed to continue to use the cash method after the revocation of its S corporation election and that changes to an overall accrual method for the C corporation’s first taxable year after the revocation, can take into account the resulting section 481(a) adjustment ratably during the six-year period starting with the year it makes the change.

For reprint and licensing requests for this article, click here.
Corporate taxes Tax reform Accounting methods Cash accounting IRS
MORE FROM ACCOUNTING TODAY