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

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.

IRS headquarters in Washington, D.C.
The Internal Revenue Service (IRS) headquarters stands in Washington, D.C., U.S. Photographer: Andrew Harrer/Bloomberg

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