Some S corps switching to C corps for lower tax rate

The reduction of the top tax rate for C corporations from 35 percent to 21 percent established by the Tax Cuts and Jobs Act has prompted some Subchapter S corporations in Pennsylvania to become C corporations. Because this switch might require a change from overall cash method to overall accrual method accounting, the Internal Revenue Service published Revenue Procedure 2018-44 to clarify the process.

When an organization terminates its S corporation status to become a C corporation and is required to adopt the overall accrual method of accounting, an adjustment arising from 481(a) should apply. This adjustment begins the first taxable year after the S corporation revocation and continues ratably for six years. For businesses that make the switch but are eligible to continue using the cash method, the same adjustment can be applied ratably for six years.

Businesses that wish to alter their structure from an S corporation to a C corporation can achieve the change by revoking the S corporation election with a majority vote from shareholders. A switch back to S corporation, however, requires the unanimous consent of shareholders.

A person who wants to explore the potential benefits and disadvantages of a change in business structure may wish to consult an attorney. An evaluation of a business's specific assets, operations and goals may allow an attorney to develop strategies for supporting business development. An attorney may inform the person about tax laws and any exposure to liability that could arise from a structural change. Legal insights might include issues related to reporting requirements and compliance with financial regulations. An attorney may also write the documents needed to revoke a business structure and initiate a new one.

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