Revoking an S corp election converts your business back into a C corporation for federal tax purposes. The mechanics are simple: shareholders holding more than half the stock sign a written consent, and the corporation files a revocation statement with the IRS service center that handles its return. The consequences are not simple. The company starts paying the 21% corporate income tax, shareholders lose the qualified business income deduction, future distributions can be taxed twice, and the Code locks you out of re-electing S status for five years. Before you file, you need to understand what each of those pieces actually does to your tax bill.
How to File the Revocation
A voluntary revocation requires a written statement filed with the IRS service center where the corporation files its Form 1120-S. Shareholders holding more than 50% of all issued and outstanding shares, counting both voting and non-voting stock, must consent in writing and sign under penalties of perjury.1Internal Revenue Service. Revoking a Subchapter S Election A bare 50% is not enough. You need more than half.
Minority shareholders who oppose the revocation have no veto once the majority-plus-one threshold is reached, and federal law does not require the corporation to notify them. State corporate governance rules sometimes do, so check yours before you file.
When the Revocation Takes Effect
The filing date controls the effective date. Three scenarios are possible under the statute.2Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination
- File by the 15th day of the third month of the tax year, and the revocation is retroactive to the first day of that year. For a calendar-year corporation, filing by March 15 makes the revocation effective January 1.
- File after that date without specifying an effective date, and the revocation takes effect on the first day of the following tax year.
- File with a specified prospective date, and the revocation takes effect on the date you choose, as long as it falls on or after the day you file.
The third option creates what the Code calls an “S termination year,” splitting the single tax year into a short S period and a short C period. Income and deductions are generally allocated between the two periods on a daily pro-rata basis. The corporation can elect to use its actual books and records instead if a 50% or greater ownership change occurs during the year.2Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination
What Changes About Your Taxes
While the company was an S corporation, it paid no federal income tax. Profits passed through to shareholders, who reported the income on their individual returns. After revocation, the company itself pays federal income tax at the flat 21% corporate rate.2Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination When those after-tax profits are later distributed, shareholders owe tax again on the dividends. That second layer is the core economic cost of C corporation status and the reason most small businesses elect S status to begin with.
Shareholders also lose the Section 199A qualified business income deduction, which can be worth up to 20% of qualified business income. Dividends paid by a C corporation do not count as qualified business income.3Internal Revenue Service. Qualified Business Income Deduction For a shareholder who had been using the full deduction, the real tax increase from revocation is larger than the 21% corporate rate alone makes it look.
Getting Money Out After the Switch
The S corporation’s Accumulated Adjustments Account tracks earnings that were previously taxed to shareholders but not yet distributed. Once you revoke, you get a limited window to pull that money out tax-free: the post-termination transition period, or PTTP.
The PTTP runs from the day after the last day of the final S corporation tax year until the later of one year after that date or the due date (including extensions) of the final S corporation return.4Office of the Law Revision Counsel. 26 USC 1377 – Definitions and Special Rule During this window, cash distributions reduce AAA and come out tax-free to each shareholder up to that shareholder’s stock basis. The distributions have to be in cash. Property distributions do not qualify.
Once the PTTP closes, any AAA that is still sitting in the company generally loses its favorable treatment, and distributions are taxed as ordinary dividends sourced from earnings and profits. There is one meaningful exception. A corporation that revoked its S election after December 21, 2017 may qualify as an “eligible terminated S corporation” under Section 1371(f). If it does, cash distributions made after the PTTP are sourced from AAA and from earnings and profits on a pro-rata basis rather than entirely from earnings and profits. This softens the post-PTTP transition but does not eliminate dividend taxation.
The practical point: if you have meaningful AAA, plan the cash distributions before the PTTP closes.
Filing the Final Returns
When the revocation splits the year, the corporation files two returns. The final Form 1120-S for the short S year is due by the 15th day of the third month after that short year ends. The Form 1120 for the short C year is due by the 15th day of the fourth month after that short year ends.5Internal Revenue Service. Publication 509 (2026), Tax Calendars Both returns are eligible for automatic six-month extensions on Form 7004.
Each shareholder has to receive a Schedule K-1 for the short S year by the same deadline as the final Form 1120-S. Late K-1s stall the shareholders’ own returns, and the IRS charges penalties for each one filed late.
If the revocation hits the first day of the tax year, because you filed by the March 15 deadline for a calendar-year corporation, there is no split. The company files one Form 1120 for the full year and skips Form 1120-S entirely.
The Five-Year Wait to Re-Elect
Revocation is not easily undone. After an S election is revoked or otherwise terminated, the corporation and any successor cannot re-elect S status until the fifth tax year beginning after the first year the termination was effective.2Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination A revocation effective January 1, 2026 means the earliest possible re-election is for the tax year beginning January 1, 2031. The rule applies whether the termination was voluntary or involuntary.
The IRS can waive the five-year wait, but only through a private letter ruling. You have to show that the revocation or termination resulted from circumstances that were not within the control of the corporation or its major shareholders, and a significant change in ownership since the termination may help. Ruling fees for requests received after January 29, 2026 are $14,500 if the request is treated as one for relief under the regulations governing late or missed elections, or $43,700 under the general letter ruling category.6Internal Revenue Service. Internal Revenue Bulletin 2026-01 Those fees do not include professional representation, which usually runs several thousand dollars on top, and the IRS is not obligated to grant the request.
One boundary worth flagging: the inadvertent termination relief that lets corporations recover from accidental disqualifying events, such as acquiring an ineligible shareholder, is not available for voluntary revocations. That relief exists for terminations the corporation did not intend.2Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination If you file a revocation statement, you have chosen the five-year rule, and your only way out early is a private letter ruling.
Before you sign the consent, run the numbers. Model the 21% corporate tax, the lost QBI deduction, the dividend tax your shareholders will owe on future distributions, and the realistic timeline for pulling AAA out through the PTTP. If the math still works after all of that, file. If it doesn’t, the five-year lockout is a long time to live with a decision made on the back of an envelope.