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Undo S Corp Election


David

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OK, I'm not getting any replies to my post that I attached to an older post with a similar issue. I guess that doesn't work to add to an older post?

New client's previous CPA told her to file for S Corp election. She did so in April with an April 14, 2018 effective date. Now the client wants to undo the S election - to be treated as never having been an S Corp. She hasn't received her acceptance letter from the IRS yet.

Client is a part time piano teacher and has 2 pianos, one for $50K which she took the sec 179 deduction. 

It appears from my research and the posts here that the S election can't be retroactively undone unless it is filed within 2 1/2 months of the tax year. Does the 2 1/2 month requirement apply from the 4/14/18 date of the S election effective date? The IRS explanations and cites aren't clear whether the 15th of the third month applies to a S Corp's short tax year or if it applies only to the calendar year.

If so, does the first month start on 4/14, therefore, the revocation letter has to be mailed by 6/29? Or does the first month begin on April 1 therefore, the revocation letter has to be mailed by 6/15?

I want to make sure that the revocation is effective retroactively to the election date so that no 1120S is required. Also, I don't want the client to pay taxes when she transfers the fully depreciated assets from an S Corp back to her SMLLC.

Thanks for your help.

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The TP was filing as a sole proprietor and her previous CPA told her to become a S Corp and filed F 2553 with an effective date of 4/14/18.

So does the TP have until 6/29/18 to undo the S election retroactive to the 4/14/18 effective date?

The instructions say that a revocation has to be made by the 15th of the third month of the taxable year. That would seem to me that the S Corp taxable year is 4/14/18 - 12/31/18 and the TP can request revocation back to the 4/14 date. However, I know the tax regs aren't as straight forward as I would think.

Thanks for your help.

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I remain confused with your facts.  Was a new entity formed on April 14th?  Or was the sole proprietor a disregarded SMLLC which decided, on April 14th, to be taxed as an S-Corp?  The answers to those two questions will shed a great deal of light on your question.  And just for the record, there is no such thing as an S Corp.  There is a corporation or an LLC TAXED as an S-Corp via election.  But to state that the "CPA told her to become a S Corp" lends no clarification to your question.

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I agree with rfassett's post above that you need to know those facts before we can help.

 

Then, there's this bit of confusion that I'll answer in a general way below that may, or may not, apply to your client's situation depending on what you know and tell us in answer to rfassett's post:
 

1 hour ago, David said:

...become a S Corp and filed F 2553 with an effective date of 4/14/18. 

So does the TP have until 6/29/18 to undo the S election retroactive to the 4/14/18 effective date?

The instructions say that a revocation has to be made by the 15th of the third month of the taxable year. That would seem to me that the S Corp taxable year is 4/14/18 - 12/31/18 and the TP can request revocation back to the 4/14 date.

 

For this or any other entity where the year has a beginning date other than the 1st of a month, the instructions for Form 2553 are clear on this, and I believe (don't have a cite for this) the revocation (if this is a new entity) would follow the same pattern and date.   If your client has formed a new entity with a beginning date of 4/14/18, the 2 months would end on 6/13/18 , and 15 days after that would be 6/28/18.

 

Quote

from the 2553 instructions:

When To Make the Election

Complete and file Form 2553:
  • No more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or
  • At any time during the tax year preceding the tax year it is to take effect.
For this purpose, the 2-month period begins on the day of the month the tax year begins and ends with the close of the day before the numerically corresponding day of the second calendar month following that month. If there is no corresponding day, use the close of the last day of the calendar month.
 
Example 1.  No prior tax year.
A calendar year small business corporation begins its first tax year on January 7.
The 2-month period ends March 6 and 15 days after that is March 21. To be an S corporation beginning with its first tax year, the corporation must file Form 2553 during the period that begins January 7 and ends March 21. Because the corporation had no prior tax year, an election made before January 7 won’t be valid.
 
 

 

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The client previously operated her business as a sole proprietor. On 4/14/18 she registered the business as a SMLLC with the Secretary of State and applied for an EIN on the same day. She also filed F 2553 requesting to be taxed as a S Corp with an effective date of 4/14/18.

So based on these facts does Judy's following answer apply? Therefore, the TP has until 6/28/18 to revoke the S election retroactively to 4/14/18?

On 6/18/2018 at 11:26 AM, jklcpa said:

For this or any other entity where the year has a beginning date other than the 1st of a month, the instructions for Form 2553 are clear on this, and I believe (don't have a cite for this) the revocation (if this is a new entity) would follow the same pattern and date.   If your client has formed a new entity with a beginning date of 4/14/18, the 2 months would end on 6/13/18 , and 15 days after that would be 6/28/18.

Thanks for your help.

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