Revoke S Status

I have a client hat is a commercial realtor and is organized as an LLC. He elected to be taxed as an S Corp via check the box election in 2020. He really shouldn't have done this (advice to elect S status was given by a prior CPA) as his LLC is very straight forward, he sucks at doing actual bookkeeping and it isn't worth the additional compliance work for him (Form 1120s and payroll, etc). In addition, he can put more $ into a Solo 401k as a Schedule C filer. So that's the backstory.

I understand that we can revoke the S status but that will bring us to C corporation treatment. How would I go about this:

Request revocation of S status as of 8/31/21. File short- period final S return for 1/1 - 8/31.
File short period initial and final C corp return for 9/1 - 12/31.
I believe he will have no "hot assets" at dissolution because he is a cash basis taxpayer and has no assets

As an alternative, maybe he could file a final S corp return as of 12/31/21; dissolve the existing LLC; create new LLC taxed as disregarded entity???

Any thoughts??

DO NOT DO THAT!!!! NOOOOOOOOOOOOOOOOOOOOOOOOOO!!!!!!!!!!!!! DO NOT.....Edited: sorry, I read something not there, that there was real estate involved.

A c corp will inevitably cost a crap load more tax since real estate appreciates.

So I'd either act as if it never happened, never transferred anything, issued stock, etc. and file a first and final 0's....and then get a new SMLLC and roll forward. OR, if he will make some decent profit later, set up payroll and use the S for reducing his SS taxes later when his profits exceed reasonable comp.

JR1, why not? OP states client is a commercial realtor. Also states that there are no assets. I take it to mean that he sells commercial real estate - not that he owns commercial real estate.

If it were me, I would form a new LLC and dissolve the current one as of 12-31-21. If there are no assets, it should be fairly simple to do that.

Dang, I read something not there, assuming she meant there was real estate in there.....

Well, I'd still never want a C corp unless you have a foreign partner or HUGE medical expenses to use a med reimbursement plan for. There's just no upside to a c corp.

Edited my original. Too quick on that trigger.

Thanks to you both for confirming. Correct - he generates income from the sale of real estate.

Realtor may want to keep the current LLC name and not go through the hassle of opening up a new business checking.

I'd probably advise revoking the S election and checking the box to be a DRE effective 12/31/21. Make sure the client is advised in writing that he's locked into DRE for 5 years if this is done.

If net income is projected to scale quickly, it might make a lot of sense to hang onto the S Corp...

One other thought now that my facts are straighter in my head....he's not legally precluded from being a corp? Many states do prohibit it....

One other thought now that my facts are straighter in my head....he's not legally precluded from being a corp? Many states do prohibit it....

Hmmm, I'm not sure. Rather than messing with it we're just going to dissolve and start new.

Ball has bounced a bit here. Is it correct that your decision is that he is just going to dissolve and start new as a new LLC that is a DRE, not a C corp? On the surface, that sounds fine, and from your facts, his S corp basis and the proceeds of the liquidation should be a wash.

But, there is a long standing Subchapter C concept called liquidation/reincorporation, which goes way back before LLCs and disregarded entities were even a gleam in someone's eye. Mostly, for reasons not relevant here, taxpayers were trying to avoid liq/reincorp treatment. Sometimes, though, they were seeking F reorg treatment.

There are existing regs. at 1.368-2 here https://www.law.cornell.edu/cfr/text/26/1.368-2. At (b)(1)(i)(A) and, mostly, at (m), the regs discuss disregarded entities. I don't see your simple situation in the examples.

My concern, perhaps unfounded, is that IRS argues that you in fact have an F reorg, as defined in the reg:

(m) Qualification as a reorganization under section 368(a)(1)(F) -

(1) Mere change. To qualify as a reorganization under section 368(a)(1)(F), a transaction must result in a mere change in identity, form, or place of organization of one corporation, however effected (a mere change). A mere change can consist of a transaction that involves an actual or deemed transfer of property from one corporation (a transferor corporation) to one other corporation (a resulting corporation).

. The possible result would be that the new LLC would be viewed as the continuation of the old LLC and thus still an S corp. I think your defense would be that a DRE is not a corporation by derfinition, so the definition above is not met, and you get your desired result.

I just think you should scan the reg. to be sure you're OK. You likely are.

Any chance you can give us an approximate net income for this client?

Any chance you can give us an approximate net income for this client?

Net income before shareholder wages ~ $100k.

Realtor may want to keep the current LLC name and not go through the hassle of opening up a new business checking.

I'd probably advise revoking the S election and checking the box to be a DRE effective 12/31/21. Make sure the client is advised in writing that he's locked into DRE for 5 years if this is done.

If net income is projected to scale quickly, it might make a lot of sense to hang onto the S Corp...

Based on conversations in other threads the consensus is that it's not that simple and that you have to go through all the run around that I detailed in original post. Can anyone chime in??

Terminating the S in order to file Schedule C will end up costing a lot of unnecessary employment taxes. Instead, I suggest he set up a controlled unrelated buyer (e.g., by declaring a taxable trust fbo an in-law or key person) which purchases 100% of the membership interests for a 15 year installment note bearing low interest. My experience is that the trade-off between cash and deferred payments is 2:1. So if he could rationalize a $450K cash price, he could rationalize a $900k 15 year note. That would generate $60k of annual goodwill deductions and thereby convert $900k of ordinary income to LTCG with reduced employment taxes. Sweet!