Some S corporations may find it beneficial to convert to C corporations because of the new, flat 21 percent C corporation tax rate. The recent changes make two modifications to existing law for a C corporation that:
- Was an S corporation on Dec. 21, 2017
- Revokes its S corporation election after December 21, 2017, but before December 22, 2019, and
- Has the same owners of stock in identical proportions, on the date of revocation and on December 22, 2017.
The following modifications apply to these entities:
- The period for including net adjustments that are required by law (Section 481(a) (2)) and attributable to the revocation of the S corporation election (e.g., a change from the cash method to an accrual method required as a result of the revocation of the S corporation election) is changed to six years. This six-year period applies to net adjustments that decrease taxable income as well as net adjustments that increase taxable income.
- Distributions of cash following the post-termination transition period are treated as coming out of the corporation’s accumulated adjustments account and earnings and profits proportionally.
- For more information, see the Corporate Methods of Accounting topic on the Tax Reform – Businesses page.