5 Year Rule

By Jason Watson, CPA
Posted February 28, 2020

S Corps that lose their “S” status must typically wait five years before being able to re-elect it. As mentioned, deliberately violating one of the rules, such as transferring stock to an ineligible shareholder, is not a good thing. What happens if it was unintentional? The IRS in private ruling letters has on a case-by-case basis allow S Corps to remain as such if the event causing termination was not reasonably within the control of the owners. Hard to demonstrate and private letter rulings (PLRs) can cost thousands of dollars.

In other cases, the IRS has relented and allowed an S Corp to continue when there is a more than 50% change in ownership. Details. Details. So, a business becomes an S Corporation. Revokes the election. Then has a greater than 50% change in ownership within five years. Begs to the IRS. Perhaps is granted an early S Corp election.

Jason Watson, CPA, is the Managing Partner of WCG, Inc., a progressive Colorado Springs tax and consultation firm.

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