Trap 13 · The termination · From Chapter 9
Terminating the S Election: Revocation and Foot-Faults
Termination ends the S election on the spot — by shareholder revocation or automatically when the corporation stops qualifying — and a five-year bar on re-election follows unless the IRS grants inadvertent-termination relief.
Revocation
A majority of shareholders can revoke the election under §1362(d), effective on the date specified — current year or prospective depending on timing. Revocation is deliberate; everything else in this trap is an accident.
Foot-faults that terminate
The election dies automatically on a terminating event: an ineligible shareholder, a second class of stock, more than 100 shareholders, or excess passive income while old C-corp earnings linger. One foot-fault is enough — see S election eligibility for the full qualification list.
Relief and the five-year bar
Section 1362(f) lets the IRS waive an inadvertent termination when the foot-fault is fixed and shareholders agree to conforming adjustments — request it fast and keep operating as an S-corp meanwhile. Without relief, the corporation waits out a five-year bar before re-electing, unless the IRS consents to earlier re-election. A late fix may still qualify for late S election relief.
Trap questions, answered
- How does an S-corp revoke its election?
- A majority of shareholders consent to revocation, which takes effect on the date specified — current year or prospective depending on timing.
- What foot-faults terminate the election?
- An ineligible shareholder, a second class of stock, more than 100 shareholders, or excess passive income with old C-corp earnings — any one ends the election.
- Can a terminated election be saved?
- Often yes — §1362(f) lets the IRS waive an inadvertent termination when the foot-fault is fixed and shareholders agree to conforming adjustments.
The law: 26 U.S.C. §1362 · Full Ch. 9 summary
The other traps: S Election Eligibility · Late S Election Relief · QSUB Election · Built-In Gains Tax