Understanding the Timing of Revoking S-Corp Election for an LLC

Question

It was suggested to me that an S-corp election would be beneficial for my single-member LLC, so I did so, but after running the numbers, it does not seem that it will save me much in taxes, and the extra FUTA taxes and W2 requirements for the S-corp really seem to make it not worthwhile.

The question is with the timing -

The IRS says "If the S corporation is on a December 31 tax year ending and requests a revocation effective February 14, the revocation is due February 14."

I just formed the LLC in October, and only received confirmation of my S-corp election in December. So if choose to revoke it now (at the end of December), how do I file taxes? Do I need to file an 1120s at all? Is my business considered an S-corp from Oct-Dec, or only for a couple weeks in December, or not at all?

Logic would dictate that there would be some period after the initial election of the S-corp status in which the election could simply be voided and have no impact, but the limited details provided by the IRS make it very unclear as to what will happen.

Thank you

EDIT: This CAN in fact be done, according to Internal Revenue Manual (IRM) 3.13.2.27.9 (01-01-2022), Request to Withdraw Classification Election, see answer below. Hopefully conscientious patrons of the forum will upvote this now, as it is quite common a situation to get into, and not easy to find this simple solution.

Answer 1

The original question is about revocation, not withdrawal, so that's what my answer is focused on. The OP later clarified that they intended to withdraw an election and explained in their answer how to do it. My answer is absolutely correct for the original question asked, but I'm glad the OP learned that he needed something else than what he was asking about.

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Look here:

• If revoking effective the first day of the tax year, the revocation is due by the 16th day of the third month of the tax year,
• If revoking effective any day other than the first day of the tax year, the revocation must be received by IRS by the requested effective date.
  • For example, the S corporation is on a December 31 tax year ending and requests a revocation effective January 1, the revocation is due March 15.
  • The S corporation is on a December 31 tax year ending and requests a revocation effective February 14, the revocation is due February 14. 

The first example is for a corporation with a calendar year, and wants to revoke starting January 1st (year start). Then it needs to file the revocation request before March 16th.

The second example is for a corporation with a calendar year, that wants to revoke starting any other day in the year, for example February 14th. Or December 27th. In that case, the revocation is due on the day on which the corporation wants it to go in effect.

So if choose to revoke it now (at the end of December), how do I file taxes? Do I need to file an 1120s at all? Is my business considered an S-corp from Oct-Dec, or only for a couple weeks in December, or not at all?

Yes, you do need to file the 1120S and all the other forms, and you mark them both as the first and the final year of existence of the corporation. The corporation existed from the date the IRS accepted your election to treat your LLC as a Corporation, until the date you revoked that election.

To reiterate, since you missed this portion and commented that I didn't answer your question:

The corporation existed from the date the IRS accepted your election to treat your LLC as a Corporation, until the date you revoked that election.

If no revocation date is specified then it will always be beginning of the corporation's tax year - either the current (if filed by the 15th day of the 3rd month), or the next. You need to not only revoke the "S" election, but also explicitly request return to disregarded status (otherwise you'll end up with a C-Corp, even worse). More analysis here.

Logic would dictate that there would be some period after the initial election of the S-corp status in which the election could simply be voided and have no impact

The logic is flawed. You explicitly asked for something, went through the trouble of filing a form and going through a process that you didn't have to go through (and in fact I suggested on this very site that you shouldn't go through - see comments to this answer). Why would the IRS allow you to backtrack this? Imagine the mayhem if anyone would be able to file forms with the IRS "to try it out" and then back out retroactively, it would be a complete nightmare to manage.

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One thing you didn't ask about, and probably didn't consider, is the liquidation of the S-Corporation. It's a taxable event. You may be able to get away with little gain (or none at all) since so little time has passed, but on the other hand - you've been allocating significant new revenues to the Corporation, so... it's more valuable than it was when created. That value may need to be properly established through a valuation/appraisal, and you may end up with some paper gains that you created out of nowhere, by your own actions. You may be royally screwed if you end up being audited and the IRS agent decides that they don't like you.

I would suggest talking to a licensed tax adviser (EA or CPA licensed in your State) to better understand your situation and how to proceed. You said someone advised you to treat your LLC as an S-Corp - was it a licensed tax adviser or an attorney? If so - talk to them about the problems you're now having. If not (and you paid for that advice) - they've practiced law without a license, you can probably file a complaint against them with your State regulators (CPA board or State Bar).

Answer 2

Fortunately, I found this CAN in fact be done, according to Internal Revenue Manual (IRM) 3.13.2.27.9 (01-01-2022), Request to Withdraw Classification Election. This is a different act than simply "revoking" the election. The other answer above is incorrect, and would only create unnecessary difficulty and potential over taxation.

The details are described in two publications below, as well as in the IRM itself. The IRS allows an LLC to withdraw S-corp election, as if it never happened, if the LLC was just formed and has not yet filed a return. All it takes is a timely letter and re-filing of form 8832.

I personally confirmed this on the phone with not one but TWO agents of the IRS.

Internal Revenue Manual (IRM) 3.13.2.27.9 (01-01-2022), Request to Withdraw Classification Election, states the following in regard to corporation election withdrawals:

- The IRS must receive the withdrawal request prior to the unextended due date of the first corporation tax return.

- The IRS permits the withdrawal via another Form 8832, Entity Classification Election, or written correspondence.

- If the taxpayer also has an S election in place, then the withdrawal of the corporation election also terminates the S election.

https://www.tomtalkstaxes.com/p/tom-talks-taxes-february-4-2022

https://tax.kpmg.us/taxnewsflash/taxnewsflash-us/tnf-entity-classification-withdrawing-change-request.html