How IRC 1362 Governs the End of S-Corp Status
An S-corporation election is not a permanent state. It can end voluntarily, through an affirmative decision by a majority of shareholders to return to C-corp status, or involuntarily, the instant the corporation fails any of the eligibility conditions in IRC 1361(b). The mechanics of each exit path differ in ways that have significant consequences for shareholders, for the corporation's income allocation in the year of termination, and for the timeline on which the corporation may re-elect S status.
IRC 1362 is the governing provision for all three phases of this exit cycle: the decision to revoke, the automatic effect of a disqualifying event, and the process by which the IRS may treat an unintentional termination as never having occurred. Practitioners who advise S-corporations need to understand each path with enough precision to plan voluntary transitions carefully and to recognize and remediate inadvertent terminations before their consequences become irreversible.
This guide walks through each subsection of IRC 1362 that governs the end of S status. The initial election procedure, including Form 2553 and late election relief, is addressed in the companion Form 2553 guide. The passive investment income termination trigger under IRC 1362(d)(3) is addressed in the IRC 1375 guide. Both are cross-referenced in Related Guides below.
IRC 1362(d)(1): Voluntary Revocation
Who May Revoke and What Consent Is Required
A voluntary revocation of an S-corporation election requires the consent of shareholders holding more than 50% of the total number of outstanding shares of stock of the corporation, including non-voting shares. The statute does not require unanimous consent; a single majority shareholder may revoke the election without the agreement of minority shareholders. The revocation is irrevocable once filed. Practitioners should confirm that the shareholders' agreement does not impose a higher or different consent threshold than the statutory majority, as a contractual restriction can expose the majority shareholder to liability even if the revocation is tax-valid. Hedge to IRC 1362(d)(1) and verify the consent threshold at IRS.gov.
Revocation requires consent of shareholders holding more than 50% of the total outstanding shares (including non-voting stock). A single majority shareholder can effect a revocation without minority consent under the statute, but minority shareholders should review the shareholders' agreement for any contractual consent requirements that are more restrictive. Hedge to IRC 1362(d)(1) and verify the consent threshold at IRS.gov.
Effective Date of Revocation
The effective date of a voluntary revocation depends on when the revocation statement is filed relative to the corporation's taxable year:
- Filed on or before the 15th day of the 3rd month of the taxable year (March 15 for a calendar-year S-corp): the revocation is effective as of the first day of the taxable year (January 1 for a calendar-year corporation). The entire current year is treated as a C-corp year.
- Filed after the 15th day of the 3rd month (after March 15 for a calendar-year S-corp): the revocation is effective as of January 1 of the following taxable year, unless the revocation statement specifies a prospective effective date that is later than the filing date.
- Prospective effective date: The revocation statement may specify a future date as the effective date, provided that date is on or after the date the revocation is filed. This allows parties to plan a specific transition date.
The practical consequence of the two-category rule is that the March 15 deadline (for calendar-year corporations) is binary: missing it by a single day defers the C-corp year by 12 months. Practitioners must verify the exact deadline at IRC 1362(d)(1) and IRS.gov for the specific taxable year before advising any client on revocation timing.
Mid-year revocation timing: A revocation filed after the 15th day of the 3rd month of the taxable year takes effect January 1 of the FOLLOWING year. The corporation remains an S-corp for the rest of the current year. If the client wants the current year to be a C-corp year, the revocation must be filed by March 15 for a calendar-year S-corp. Missing this deadline by even one day defers the C-corp year by 12 months, with the result that Q1 income already earned under S-corp flow-through treatment remains S-corp income for the full current year. Verify the exact deadline at IRC 1362(d)(1) and IRS.gov before advising on revocation timing.
Content of the Revocation Statement
The revocation statement must be filed with the IRS Service Center where the corporation files its Form 1120-S. The statement must include:
- The corporation's name, address, and Employer Identification Number (EIN)
- The date the revocation is to be effective (if a prospective date is specified)
- For each consenting shareholder: name, address, Taxpayer Identification Number (TIN), number of shares held, and the date the shares were acquired
- A declaration that the consent is that of persons holding more than 50% of the total outstanding shares
The revocation is irrevocable once filed. Verify the current content requirements at IRS.gov before preparing any revocation statement, as IRS administrative requirements may have been updated since this guide was last reviewed.
IRC 1362(e): Short Taxable Year Consequences
When S status terminates mid-year (either by a revocation with a retroactive January 1 effective date or by an involuntary event), IRC 1362(e) creates two short taxable years: an S short year covering the period in which the corporation was an S-corp and a C short year covering the balance of the year. Income, deductions, and credits must be allocated between the two short years.
The default allocation method is the per-share per-day (PSPD) rule, which spreads items ratably across all days in the taxable year. If all shareholders consent, the corporation may elect under IRC 1377(a)(2) to close the books as of the termination date, treating each period as a separate year for income allocation purposes. The closing-of-books election is a separately filed election, not part of the revocation statement, and has its own consent and deadline requirements. See the IRC 1377 practitioner guide (cross-referenced in Related Guides) for election mechanics.
IRC 1362(d)(2): Involuntary Termination
The Triggering Events
An S election terminates automatically on the date on which any event occurs that causes the corporation to fail to qualify as a small business corporation under IRC 1361(b). The termination is not an election by the corporation or its shareholders; it is a statutory consequence that takes effect the instant the disqualifying condition arises. Common triggering events include:
- A shareholder transfers stock to an ineligible person: a nonresident alien, a C-corporation, a partnership, or a trust that does not meet the ESBT, QSST, grantor trust, testamentary trust, or voting trust requirements of IRC 1361(c)(2)
- The total number of shareholders exceeds 100 (calculated after applying the family attribution rules of IRC 1361(c)(1))
- A second class of stock is created through debt modifications, side agreements, or equity compensation arrangements that confer disproportionate economic rights not covered by the straight-debt safe harbor of IRC 1361(c)(5)
- A shareholder becomes a nonresident alien after acquiring stock (applying the status as of the date the status change occurs)
The eligibility rules in IRC 1361(b) that define a small business corporation (100-shareholder limit, eligible shareholder classes, single class of stock) are covered in depth in the IRC 1361 practitioner guide (cross-referenced in Related Guides). This guide focuses on the mechanics of what happens once a termination occurs.
The S election terminates on the DATE the disqualifying event occurs, not on the date the corporation or its advisors discover the event. If an ineligible shareholder acquires stock on January 10, the S election terminated on January 10, even if no one knows about it until September. Income from January 1 through January 10 (the S short year) is S-corp income; income from January 11 forward (the C short year) is C-corp income. All shareholders and the corporation must amend their returns accordingly unless IRC 1362(f) inadvertent termination relief is obtained. Delay in discovering and acting on the termination weakens the PLR application for inadvertent termination relief.
Effect on the Taxable Year
The S short year runs from the first day of the corporation's taxable year through the day before the termination date (or through the termination date, depending on IRS guidance in effect; verify at IRS.gov). The C short year runs from the termination date through the last day of the taxable year. Two separate tax returns are required: a final Form 1120-S for the S short year and a Form 1120 (C-corp return) for the C short year.
Shareholders must report their pro-rata share of S-corp items for the S short year on their individual returns. For the C short year, the corporation is taxed as a C-corp and income does not flow through to shareholders (except for dividends distributed from earnings and profits). The shift from flow-through to corporate-level tax can significantly increase the combined tax burden on income earned in the C short year.
IRC 1362(d)(3): Passive Investment Income Termination (Out of Scope)
IRC 1362(d)(3) provides a separate involuntary termination trigger based on excessive passive investment income when the S-corporation has accumulated C-corp earnings and profits. That trigger, its interaction with IRC 1375, and the planning strategies to prevent or remedy a passive income termination are addressed in full in the IRC 1375 practitioner guide (see Related Guides). This guide does not address IRC 1362(d)(3).
Voluntary Revocation vs. Involuntary Termination: A Practitioner Comparison
The table below compares the key mechanics of a voluntary revocation under IRC 1362(d)(1) and an involuntary termination under IRC 1362(d)(2) across ten practice-relevant dimensions.
| Item | IRC 1362(d)(1) Voluntary Revocation | IRC 1362(d)(2) Involuntary Termination |
|---|---|---|
| How initiated | Affirmative shareholder decision; revocation statement filed with IRS | Automatic; occurs by operation of law when a disqualifying event takes place |
| Consent required | Yes; shareholders holding more than 50% of outstanding shares must consent | No consent required; termination is automatic on the triggering event date |
| Effective date rule | If filed by the 15th day of the 3rd month: January 1 of current year. If filed after that date: January 1 of the following year (or a specified prospective date) | The exact date the disqualifying event occurs, regardless of when it is discovered |
| Ability to specify retroactive effective date | Yes; a pre-March-15 filing can make the revocation effective January 1 of the current year | No; the termination date is fixed by law as the trigger date |
| Two-short-year consequences | Yes, when the revocation is effective other than January 1 of the next year (i.e., retroactive to current January 1 or mid-year prospective date) | Yes, always; S short year ends on the termination date; C short year begins on that date |
| Closing-of-books election available (IRC 1377(a)(2)) | Yes, with consent of all affected shareholders; allocates actual items to each short year | Yes, with consent of all affected shareholders; particularly important given that the termination date may fall mid-year without warning |
| 5-year re-election bar (IRC 1362(g)) | Yes; the 5-year bar applies from the first taxable year for which the revocation was effective | Yes; the 5-year bar applies from the first taxable year for which the termination was effective |
| Inadvertent termination relief available | Not applicable; a voluntary revocation is intentional by definition | Yes; IRC 1362(f) PLR relief is available if the termination was inadvertent, corrective steps were taken, and returns were filed consistently with S-corp status |
| PLR process required | Only if seeking early re-election consent under IRC 1362(g) before the 5-year bar expires | Yes, for inadvertent termination relief under IRC 1362(f); also for early re-election consent under IRC 1362(g) |
| BIG tax consequence on re-election (IRC 1374) | Yes; a new 5-year built-in gains recognition period begins from the date of re-election after a C-corp period | Yes; same consequence if re-election follows a C-corp period; if IRC 1362(f) relief is granted, the S election is treated as uninterrupted and no new BIG period is triggered |
IRC 1362(f): Inadvertent Termination Relief
The Three-Part Test
IRC 1362(f) authorizes the IRS to grant relief and treat an S election as remaining in effect notwithstanding an event that would otherwise terminate it, provided the IRS determines that:
- The termination was inadvertent (not the result of an intentional act by the corporation or its shareholders to cause the S election to end)
- Steps were taken to correct the cause of the termination within a reasonable time after the corporation discovered the terminating event
- During the period of the inadvertent termination, the corporation and each of its shareholders reported their income consistent with S-corporation treatment (that is, they filed returns as if the S election remained in effect)
When all three conditions are met and the IRS grants relief, the S election is treated as having remained in effect throughout the inadvertent termination period. The corporation and its shareholders are not required to amend their returns to reflect C-corp treatment for that period. If any adjustments are required as a condition of the relief, those are specified in the PLR.
Obtaining Relief: The PLR Process Under Rev. Proc. 2013-30
Relief under IRC 1362(f) is not self-executing. The corporation must apply for a Private Letter Ruling from the IRS National Office. The PLR process is governed by Rev. Proc. 2013-30, which provides both general PLR procedures and, for certain categories of inadvertent terminations, an expedited relief path. Expedited relief is available when the terminating event was a specific, identifiable eligibility defect (such as stock transfer to an ineligible shareholder or an inadvertent second class of stock) and the corporation has promptly taken corrective steps. Verify whether the specific facts qualify for expedited or general procedures under the current version of Rev. Proc. 2013-30 at IRS.gov before filing.
The PLR request must include:
- A detailed statement of facts describing how the terminating event occurred and when it was discovered
- Documentation that corrective action was taken and when
- Copies of all tax returns filed by the corporation and its shareholders for the period of the inadvertent termination, demonstrating consistent S-corp reporting
- Representations that the termination was not intentional
- The applicable user fee (set annually by Rev. Proc. 2026-1 or its successor; verify the current amount at IRS.gov before filing)
PLR requests for IRC 1362(f) inadvertent termination relief carry a user fee that is updated annually in Rev. Proc. 2026-1 (or its successor). Do not quote a fee to a client without verifying the current schedule at IRS.gov. The content requirements for the PLR request are set out in Rev. Proc. 2013-30; verify the most current version of those procedures before preparing any PLR submission. Errors or omissions in the PLR request can delay or forfeit relief.
Time-Sensitivity and the "Reasonable Time" Requirement
The IRS expects corrective action to be taken within a reasonable time after the corporation discovers the inadvertent termination. The statute does not define "reasonable time," and the IRS evaluates the facts of each case. What is clear is that a PLR application submitted years after discovery, with no corrective action taken in the interim, presents a materially weaker case for relief. Practitioners who discover an inadvertent termination should advise clients to take corrective steps immediately (for example, having the ineligible shareholder transfer the stock to an eligible holder) and to file the PLR request promptly. The sequence of discovery, correction, and PLR filing should be documented carefully.
IRC 1362(g): The 5-Year Bar on Re-Election
General Rule
Under IRC 1362(g), a corporation whose S election has been terminated (whether by voluntary revocation under IRC 1362(d)(1) or involuntary termination under IRC 1362(d)(2)) may not re-elect S status for 5 taxable years following the first taxable year for which the termination was effective, without the consent of the IRS. The 5-year period begins from the first year of C-corp status, not from the year of discovery or the year the PLR is sought. Hedge to IRC 1362(g) and verify the running of the 5-year period at IRS.gov for any specific set of facts.
IRS Consent to Early Re-Election
The IRS may consent to a re-election before the 5-year period expires. Consent is obtained by private letter ruling. Practitioners who advised a revocation without considering future re-election timing may find themselves filing a second PLR to obtain early re-election consent. The PLR for early re-election consent is a separate proceeding from any PLR for inadvertent termination relief under IRC 1362(f), and carries its own user fee and content requirements.
Built-In Gains Tax on Re-Election
If the corporation re-elects S status after a period as a C-corp (whether following the natural expiration of the 5-year bar or by IRS consent to early re-election), a new 5-year built-in gains recognition period under IRC 1374 begins as of the date of re-election. Any net unrealized built-in gain that existed in the corporation's assets on the re-election date is subject to the BIG tax if it is recognized within that 5-year window. This consequence makes the decision to revoke S status, and the planning around re-election timing, substantially more complex when the corporation holds appreciated assets. See the IRC 1374 practitioner guide (cross-referenced in Related Guides) for a full treatment of the BIG tax and planning strategies.
Note the contrast with a successful IRC 1362(f) inadvertent termination relief outcome: if the IRS grants the PLR and treats the S election as having remained in effect continuously, no C-corp period is recognized for BIG tax purposes, and no new recognition period is triggered. This is one of the most significant benefits of obtaining IRC 1362(f) relief, and one of the strongest arguments for seeking it promptly when an inadvertent termination is discovered.
On every S-corp engagement, verify at the start of each engagement year that: (1) no shareholder transfers have occurred since the last engagement (any transfer to a nonresident alien, C-corporation, partnership, or ineligible trust terminates the S election on the transfer date); (2) the corporation has not inadvertently created a second class of stock through debt modifications, restricted stock plans, or side agreements; and (3) any trust shareholders hold the stock under a qualifying ESBT or QSST structure, and the elections on file match the current trust instruments. An inadvertent termination discovered late in the year is recoverable via IRC 1362(f) PLR only if corrective steps are taken promptly; the earlier the discovery, the stronger the case for relief.
When S status terminates mid-year (either by revocation or involuntary event), the corporation may elect under IRC 1377(a)(2) to close the books as of the termination date rather than allocating income on a per-share per-day basis. All affected shareholders must consent. The closing-of-books election is a separate filing from the revocation statement and has its own deadline and content requirements. See the IRC 1377 practitioner guide (cross-linked in Related Guides) for the election mechanics, consent procedure, and income allocation rules for the two short taxable years.
OBBBA Estate Tax Interaction: Higher Stakes for Trust Shareholders
The One Big Beautiful Bill Act permanently set the federal estate and gift tax exemption at approximately $15 million per individual under IRC 2010 (indexed for inflation after 2026). This higher exemption has increased the value and frequency of S-corp stock held in taxable estates and trust structures, because more clients now pass S-corp interests through estate plans without needing to restructure for estate tax purposes.
The direct consequence for IRC 1362 practice: a trust transfer that fails ESBT or QSST qualification under IRC 1361(c)(2) is now a higher-stakes event. When S-corp stock represents a larger portion of a taxable estate (as it often does under the expanded exemption), an inadvertent termination of S status through an ineligible trust transfer has greater economic consequence. The IRC 1362(f) PLR process becomes more consequential and more urgent in this environment. Estate planners working with S-corp stock should confirm at the time of trust funding and at each subsequent trust modification that the trust's current terms and beneficiary structure satisfy the ESBT or QSST requirements on file with the IRS. See the IRC 1361 guide (cross-referenced in Related Guides) for a full treatment of ESBT and QSST eligibility rules.
Frequently Asked Questions
A voluntary revocation under IRC 1362(d)(1) is an affirmative election by shareholders holding more than 50% of outstanding shares to end the S-corporation election. It is filed with the IRS and takes effect on a date determined by the filing date relative to the start of the taxable year. An involuntary termination under IRC 1362(d)(2) occurs automatically, without any shareholder action, on the date the corporation ceases to qualify as a small business corporation under IRC 1361(b). Common involuntary triggers are the acquisition of stock by an ineligible shareholder, exceeding the 100-shareholder limit, and the creation of a second class of stock. Unlike a voluntary revocation, no consent or filing is required for the termination to occur; it is effective the instant the disqualifying event happens.
For a calendar-year S-corporation, a revocation filed after March 15 (the 15th day of the 3rd month) takes effect January 1 of the following taxable year, unless the revocation specifies a prospective effective date that is later than the filing date. A revocation filed on April 1 does not end S status on April 1 or on January 1 of the current year; the corporation remains an S-corp for the entire current calendar year. It becomes a C-corp beginning January 1 of the year after the revocation is filed. Verify the exact deadline at IRC 1362(d)(1) and IRS.gov before advising on timing.
An involuntary termination under IRC 1362(d)(2) occurs on the date any event causes the corporation to fail the eligibility requirements of IRC 1361(b). Common triggers include: (1) a shareholder transfers stock to an ineligible person (a nonresident alien, a C-corporation, a partnership, or a trust that does not qualify as an ESBT, QSST, grantor trust, or other enumerated eligible trust); (2) the number of shareholders exceeds 100 (after applying family attribution rules under IRC 1361(c)(1)); or (3) a second class of stock is created through debt modifications, restricted stock arrangements, or other instruments not covered by the straight-debt safe harbor of IRC 1361(c)(5). The IRC 1362(d)(3) passive investment income termination trigger is a separate path covered in the IRC 1375 guide.
Relief under IRC 1362(f) may still be available, but an 18-month delay between the termination date and the PLR request is a significant negative factor. The IRS looks at whether corrective action was taken within a reasonable time after the corporation discovered the termination. A gap between discovery and corrective action weakens the application. The PLR must demonstrate that the termination was inadvertent, that the corporation and all shareholders filed all returns consistent with S-corp status for the period, and that the disqualifying condition has been corrected. File the PLR request and take corrective steps as promptly as possible upon discovery. Verify current PLR procedures and the user fee at IRS.gov.
A PLR request for IRC 1362(f) relief must demonstrate: (1) the termination was inadvertent and not intentional; (2) the corporation and all shareholders reported income and filed all returns consistent with S-corporation treatment for the inadvertent termination period; and (3) the disqualifying condition has been corrected within a reasonable time after discovery. The request is filed under Rev. Proc. 2013-30, carries a user fee set by Rev. Proc. 2026-1 (or its successor), and must include specific representations, documentation of the corrective steps taken, and copies of relevant returns. Verify all current content requirements and the user fee at IRS.gov before filing.
Generally, no. Under IRC 1362(g), a corporation whose S election has been terminated may not re-elect S status for 5 taxable years following the first taxable year for which the termination was effective, without IRS consent. To re-elect before the 5-year period expires, the corporation must obtain IRS consent by private letter ruling. If re-election follows a C-corp period, a new 5-year built-in gains recognition period under IRC 1374 begins from the date of re-election. Verify the 5-year rule and consent procedures at IRC 1362(g) and IRS.gov.
IRC 1362(e) creates two short taxable years when S status terminates mid-year: an S short year covering the period before the termination date and a C short year covering the period from the termination date through the end of the taxable year. The default allocation method is the per-share per-day (PSPD) rule, which spreads items ratably across the full year. If all shareholders consent, the corporation may elect under IRC 1377(a)(2) to close the books as of the termination date and allocate items based on actual results for each period. Two separate returns are required: a final Form 1120-S for the S short year and a Form 1120 for the C short year.
The IRC 1362(d)(2) termination date defines the exact point at which the S short year ends and the C short year begins. The IRC 1377(a)(2) closing-of-books election treats that termination date as a hard dividing line: items of income, loss, deduction, and credit attributable to the period before the termination date are allocated to the S short year and flow through to shareholders on Schedule K-1; items after the termination date belong to the C short year. Without the election, items are spread on a PSPD basis, which may produce materially different results when income is concentrated in one part of the year. All shareholders (including any disqualifying shareholder who triggered the involuntary termination) must consent to the closing-of-books election.