Convert LLC w/S Corp election to sole proprietorship

Forum|Forum|2 years ago
December 13, 2023
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I set up a single-member LLC in 2022 and e-filed my 2022 business taxes with my EIN and filed Form 2553 to be taxed as an S Corp. The IRS mailed my Form 2553 back to me for a wet signature. I have not sent it back to them yet. I've decided I would rather file future returns as a sole proprietorship. Am I allowed to make that change? do I have to go back and amend my 2022 return as well?

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Best answer by Rick19744

Some follow-up comments:

I believe you have some hurdles to cross.
Since you have never responded to the IRS request, and provided them with a completed form 2553, you technically don't have a valid S election.
To have a valid S election, the IRS will send you a letter of acceptance.
Since you have already filed the form 1120-S, I am not sure what stance the IRS will take at this point in time. This needs to be figured out before you file any 2023 returns.
- The IRS could deny the S election. You would then need to amend your 2022 form 1040 and possibly have some issues at the state level as well.
- Many states require a copy of the S corp acceptance letter be attached to the first year state return. You have not done this since you never received acceptance.
- The IRS may accept the S election even though there has been a significant time lapse since their request. If this is the case, then you need to file a final form 1120-S.
  - In this case, you will have a complete liquidation of the S corp assets
  - You may need to file form 1099-DIV to report liquidating distributions
  - You will need to determine gain or loss on the liquidation of the S corp
  - You will need to file any final state S corp return
You need to send back the appropriate signed form 2553 as requested; along with a copy of the letter that was included. The response from the IRS will then dictate the next move.
Once you receive the response from the IRS, I would then recommend you meet with a tax professional to clean this up and get started down the right path. Don't be penny wise and pound foolish here. Penalties could easily be more than any professional time.

Anonymous_

Employee

No text available

Rick19744

Employee

Please respond to @Anonymous_ question on what return you filed in 2022.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

Critter-3

Right now the IRS has not accepted your request to change to an S-Corp so if you filed your personal return already using the K-1 form issued by the 1120-S then sign the form and return it for the 2022 return. Then if you want to revert to the Sch C in 2024 you will file one more 1120-S form for 2023 showing the income & expenses and checking the FINAL box.