How to Revoke S Corp Election for a Single-Member LLC
Learn the process of revoking an S Corp election for a single-member LLC, including key requirements, tax implications, and state-level considerations.
Electing S Corp status for a single-member LLC can provide tax benefits, but it may not always be the best long-term choice. Business needs change, and reverting to default taxation as a sole proprietorship might simplify filing requirements or reduce administrative burdens.
Reversing an S Corp election requires following specific IRS procedures and deadlines. Understanding the necessary steps ensures compliance and avoids penalties.
Requirements to Revoke the Election
To revoke an S Corp election, the IRS requires a formal written request from the LLC’s owner. The request must include the business’s name, EIN, effective revocation date, and the owner’s signature. Only the taxpayer who made the election can reverse it.
Timing matters. If the revocation is filed by the 15th day of the third month of the tax year, it takes effect for the current year. Otherwise, the change applies to the following year. These deadlines align with IRS tax regulations.
The request must be correctly formatted and sent to the appropriate IRS office. Errors can cause delays or rejection. If the LLC has multiple owners due to restructuring, unanimous consent from all shareholders is required.
Filing Procedures
The revocation request must clearly state the decision to terminate S Corporation status and reference Section 1362(d)(1) of the Internal Revenue Code. It should include the LLC’s EIN, the date the S Corp election was originally made, and the intended termination date. The owner must sign the request.
The request must be mailed to the appropriate IRS service center based on the business’s location. The IRS does not accept electronic submissions, so using certified mail with a return receipt is recommended for proof of delivery.
Outstanding tax obligations or unfiled returns should be resolved before submitting the revocation request, as the IRS may delay processing if compliance issues exist. If the LLC has elected S Corporation status for state tax purposes, a separate revocation notice may be required.
Post-Revocation Tax Changes
Once the S Corporation election is revoked, the single-member LLC is taxed as a disregarded entity for federal tax purposes. Instead of filing an S Corporation tax return (Form 1120-S), the business’s income, expenses, and deductions are reported on the owner’s personal tax return using Schedule C of Form 1040. This eliminates separate corporate tax filings, reducing administrative costs.
The change also affects self-employment taxes. Under an S Corporation, owners can take distributions not subject to self-employment tax. As a disregarded entity, all net earnings are subject to self-employment tax, which includes a 12.4% Social Security tax on income up to $168,600 (for 2024) and a 2.9% Medicare tax on all earnings. An additional 0.9% Medicare surtax applies to income over $200,000 for single filers or $250,000 for married couples filing jointly. This shift can increase tax liability, requiring adjustments to estimated quarterly payments.
Deductions and tax credits may also be affected. Health insurance premiums for the owner are reported differently under sole proprietorship taxation than under an S Corporation. Retirement contributions to a solo 401(k) or SEP IRA remain largely unchanged, but eligibility for the Qualified Business Income (QBI) deduction under Section 199A may be impacted. This deduction allows certain businesses to deduct up to 20% of net income, but eligibility depends on taxable income and business classification.
Impact on Ownership Records
Revoking an S Corporation election does not change the LLC’s legal structure but affects financial recordkeeping. S Corporations require tracking stock ownership and basis adjustments under Section 1367 of the Internal Revenue Code. Once the election is revoked, these requirements no longer apply, simplifying financial reporting.
Retained earnings are also treated differently. Under S Corporation taxation, undistributed profits are recorded in the accumulated adjustments account (AAA) and are generally tax-free when distributed, provided they do not exceed basis. After revocation, retained earnings become part of the LLC’s capital account, which follows different tax rules. The capital account reflects the owner’s total investment, contributions, and withdrawals, requiring accurate tracking to avoid tax issues.
State-Level Considerations
While revoking an S Corporation election is a federal tax matter, state tax laws may require additional steps. Some states automatically follow federal tax classifications, while others require a separate filing to terminate S Corporation treatment at the state level. Failing to notify the state tax agency could result in continued state-level S Corporation taxation, leading to discrepancies in tax filings.
State tax obligations may also change. For example, California imposes an $800 annual franchise tax on LLCs, while S Corporations are subject to a 1.5% entity-level tax on net income. Revoking S Corporation status may shift the tax burden to the flat franchise tax, which could be more or less favorable depending on profitability. Similarly, New York requires certain LLCs to pay a filing fee based on gross income, which differs from the fixed S Corporation franchise tax. Understanding these state-specific rules ensures a smooth transition.