Convert from an S Corp to a C Corp
If you currently have an S corporation (S corp) in Florida, the relatively recent changes to federal tax law could mean that converting to a C corporation (C corp) could be beneficial to you. There are a number of reasons that businesses start as C corporations and then file the necessary paperwork with the IRS to become an S corporation. There are also situations in which it makes sense for an S corporation to convert (back) to a C corporation. One of those reasons concerns the Tax Cuts and Jobs Act (TCJA). If you want to convert from an S corp to a C corp for tax reasons related to the TCJA, there are certain benefits that will expire soon.
Indeed, according to a news release from the IRS, certain TCJA changes will only apply to C corporations that revoke their S corporation status before December 22, 2019. We will tell you more about the TCJA changes and the corresponding deadline.
Difference Between C Corporations and S Corporation for Tax Purposes
Corporations in general are one type of business structure you can choose when you are forming a business entity. As you likely know, C corps are a type of corporation owned by shareholders and governed by a board of directors. Once you decide to form a corporation, you will likely be selecting between a C corp and an S corp. The C corp is the default, or standard, type of corporation for anyone creating a business. To be sure, even an S corp begins as a C corp. Then, if you want to become an S corporation, you must take any necessary steps to become an S corp through the IRS.
In terms of taxes, a C corporation is taxed on earnings, and then the shareholders are taxed when earnings are distributed, while S corporations pass corporate income through to their shareholders for tax purposes, according to the IRS news release. These forms of taxation allow an S corporation to avoid double taxation since gains and losses pass through to the shareholders’ personal tax returns.
Making Changes Due to the Tax Cuts and Jobs Act
With the Tax Cuts and Jobs Act changes, the important thing to know is that C corporations now have a flat 21 percent corporate tax rate. With the passage of the TCJA, there are two additional changes for an S corporation that converts to a C corporation. According to the IRS news release, those changes are as follows:
- Corporation should report net adjustments attributable to the revocation over six years; and
- Distributions of cash following the post-termination transition period may be treated as coming out of the corporation’s accumulated adjustments account.
In order to take advantage, however, the following must be true of a C corporation that used to be an S corporation:
- Corporation was an S corp as of December 21, 2017;
- Corporation revoked its S corporation election in the period after December 21, 2017 but before December 22, 2019; and
- Corporation has the same owners of stock in the same proportions on December 21, 2017 and on the date of revocation.
While an S corporation can convert to a C corporation at any point in time, the benefits discussed above are only available to an S corp that revokes its status to become a C corp before December 22, 2019.
Contact a Florida Business Formation Attorney
If you have questions about converting from an S corporation to a C corporation, a Florida entity formation attorney can help. Contact the Law Office of Clifford J. Hunt, P.A. to learn more.