Revoking or Terminating S Corporation Status

An S Corporation election can come to an end in one of two ways: a voluntary revocation approved by the shareholders, or an involuntary termination that happens automatically when the corporation violates one of the S Corporation eligibility rules. A voluntary revocation requires the consent of shareholders holding more than 50% of the outstanding shares and takes effect either on the date specified in the revocation statement or at the start of the following tax year. Involuntary termination occurs automatically if the corporation does something that breaks the rules, such as exceeding 100 shareholders, issuing a second class of stock, or transferring shares to a corporation, partnership, or nonresident alien. Once an S Corporation election is terminated, the corporation is generally treated as a C Corporation and cannot re-elect S Corporation status for five years without receiving special permission from the IRS. Business owners who are considering significant changes to ownership structure, capital, or investor makeup should consult a tax professional before making those changes to avoid accidentally losing their S Corporation status.