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Liquidate and Dissolve the corporation. Taxwise, all assets are deemed distributed at FMV. S Corp reports the gain, which flows through on the K-1.
Liquidate and Dissolve the corporation. Taxwise, all assets are deemed distributed at FMV. S Corp reports the gain, which flows through on the K-1.
To revoke a Subchapter S election/small business election that was made on Form 2553, submit a statement of revocation to the service center where you file your annual return.
The statement should state:
Due Date of Revocation:
https://www.irs.gov/forms-pubs/revoking-a-subchapter-s-election
If you don't want to kill the corporation. Sometimes there is a good reason for C being better than S. For example, a client wanted to keep his AGI lower so that less of his Social Security would be taxed. That was before corporate rates on lower incomes were raised.
So of the two answers from @sjrcpa and @BobKamman which is the best course to take. @sjrcpa method creates gain from dissolving corporation and liquidating assets. How are assets treated when revoking S-corp election per @BobKamman instructions? I'm curious to further my knowledge base. I have limited experience with S-corps and so far any that have ceased were sales.
Best is relative. Bob's results in a C corporation with the assets and liabilities of the former S Corporation.
Mine results in no corporation and assets and liabilities in the hands of the former owner who can report on Sch C which is what OP thinks he wants.
Me again. If this was originally a single member LLC that elected S-Corp treatment then wouldn't @BobKamman method be the best? Assets would move from SCorp to LLC without reporting any gain - correct.
When you revoke the S election, you are a C Corporation for tax purposes. The LLC originally made an election to be taxed as a corporation and as an S corporation.
Thank you.
Definitely not a "one size fits all" situation. But why does the client want to discontinue corporate form -- accountant is charging too much for income tax and payroll returns?
I used to have an office neighbor CPA who for years got away with putting all his clients on zero payroll, all K-1 distributions. I wonder now how they feel about the size of their Social Security checks. But if someone with $80K income wants to avoid payroll taxes on the last $20K, that $3,000+ savings can go a long way to return preparation fees.
Another client, starting a new contracting business, went to community college classes taught by a CPA who stressed that everyone should elect S status. That was before they met me. They were putting all the profits back in the business, but paying tax on them at a 35% rate because of the wife's healthy W-2 income, instead of 15% lower corporate rate. Their IRS problems led to their eventual bankruptcy.
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