Series 22: 1.1.5.3. Revocability

1.1.5.3.  Revocability

The existence of an S corporation is perpetual. However, it may revoke its Subchapter S designation voluntarily by filing with the IRS by March 15th of any calendar year in which at least 50% of the membership has voted to terminate. The IRS may also terminate a company’s S corporation status whenever the business entity has violated its required qualifications. A business can also lose its eligibility when its gross income consists of more than 25% passive income over a period of three consecutive years. Passive income is income that is not directly earned by the efforts of the business, such as interest, dividends, and certain types of rent.

Once an S corporation has revoked its status or been terminated, it may not elect to be reinstated as an S corp until the fifth taxable year after the termination has become effective.

26 US Code 1362