Can a C Corporation Elect S Corporation Status?

How a C Corporation Becomes an S Corporation

An S corporation isn't a different kind of entity under state law; it's a federal tax election a corporation makes on top of its existing state-law status as a corporation. A C corporation that meets the IRS eligibility rules can file Form 2553, Election by a Small Business Corporation, to switch how the IRS taxes its income going forward, without filing anything new with its state's Secretary of State.

Eligibility Rules the Corporation Must Meet

Per the IRS, to qualify for S corporation status, a corporation must be a domestic corporation, have no more than 100 shareholders, have only eligible shareholders (generally individuals, certain trusts, and estates, not partnerships, corporations, or nonresident aliens), and have only one class of stock. See our guides on S corporation shareholder limits and whether a nonresident can own an S corporation for the details behind each of these rules.

The Two-Months-15-Days Filing Deadline

Form 2553 generally has to be filed no later than two months and 15 days after the start of the tax year the election is meant to take effect, or at any time during the tax year immediately before that, according to the IRS instructions for Form 2553. For a calendar-year corporation that wants S status effective January 1, that means filing by March 15 of that same year. Miss that window and the election, if accepted at all, typically doesn't take effect until the following tax year.

Every Shareholder Has to Sign

Form 2553 isn't valid unless every shareholder who held stock at any time during the part of the tax year before the election is filed signs a consent statement on the form. For a corporation with several shareholders, getting every signature lined up before the deadline is often the practical bottleneck, more than the eligibility rules themselves.

Late Election Relief

A corporation that missed the deadline isn't necessarily out of options. Under Revenue Procedure 2013-30, the IRS allows late S corporation elections when the corporation intended to be taxed as an S corporation from the intended effective date, the only reason it isn't one is the late filing, and it has reasonable cause for missing the deadline. Relief generally has to be requested within 3 years and 75 days of the intended effective date, and the late Form 2553 must state the words FILED PURSUANT TO REV. PROC. 2013-30 at the top.

What Changes Once the Election Takes Effect

Once the S election is in effect, the corporation generally stops paying federal corporate income tax on its own profit and instead passes income, losses, deductions, and credits through to shareholders, who report their share on their individual returns, similar to how a partnership is taxed. The corporation still files an annual return, Form 1120-S, and issues a Schedule K-1 to each shareholder, but the corporation itself typically doesn't owe the 21% corporate rate that applies to a C corporation.

Built-In Gains Tax Can Still Apply

A C corporation that converts to an S corporation and then sells an asset that had appreciated in value while it was still a C corporation can trigger a built-in gains tax at the corporate level if the sale happens within five years of the S election. This is a narrow but real tax trap for a converting corporation holding appreciated property, and it's worth reviewing with a tax professional before the conversion, not after a sale.

Revoking the Election Later

An S corporation can voluntarily revoke its election by filing a statement signed by shareholders holding more than 50% of the corporation's shares, which generally returns the corporation to C corporation tax treatment. The IRS generally won't let a corporation re-elect S status for five years after a revocation without its consent, so this isn't a decision to make casually.

Confirm Every Shareholder Will Actually Sign

Before you count on an S election taking effect by a given date, confirm every current shareholder is willing and available to sign Form 2553 before the two-months-15-days deadline. A single missing signature can delay the effective date by a full year if it pushes you past the window.

Check State Tax Treatment Separately

Not every state automatically follows the federal S corporation election. Some states tax S corporations the same as C corporations at the state level, others impose a separate S corporation franchise tax, like California's 1.5% tax on S corporation net income, and some recognize the federal election without any state-level tax. Check your specific state's tax agency before assuming your state tax bill will drop along with your federal one.

Review Appreciated Assets Before Converting

If your C corporation holds property that's appreciated significantly in value, review the built-in gains tax exposure with a tax professional before electing S status, since selling that property within five years of the election can trigger a corporate-level tax that an election made for a corporation with no appreciated assets wouldn't face.

This Is Not Tax Advice

Whether an S election fits your corporation depends on your shareholder structure, your profit level, and your state's tax treatment. Talk to a tax professional before filing Form 2553, and before committing to the ongoing payroll and reasonable-compensation obligations that come with S corporation status.