Converting From S Corp to C Corp: Final 1371(f) Regulations, Favorable Treatment of PTTP Distributions

Along with several provisions that adversely impact S corps, tax reform's permanent reduction in C corp income tax rates is leading many S corps to evaluate their entity choice and explore whether converting to C corp status will provide more tax benefits. Tax advisers must have a solid grasp of whether, when, and how to make an S corp revocation election to avoid costly tax consequences.

The law makes several changes to S corporation income treatment that negatively impact some companies and their shareholders. Most notably, the 20 percent pass-through deduction under Section 199A does not apply to specific trades or businesses, and some S corporations may benefit from spinning off certain operations into C corporation status while retaining the S corp election for others.

The law also contains provisions that in many cases will allow shareholders of "eligible terminated S corporations" to treat dividends paid during the "post-termination transition period" (PTTP) as coming from the corporation's accumulated adjustment account or E&P more favorably than a typical dividend distribution from an operating C corporation. Such distributions are not subject to tax to the extent of the shareholder's basis in the S corporation stock. Final regulations provide rules for S corporation distributions made during the PTTP to qualify for 1371(f) treatment allowing taxpayers to treat a portion of these distributions as distributions from AAA for ETSCs (eligible terminated S corporations).

Listen as our expert panel provides thorough and practical guidance to help advisers determine whether, as well as when and how, to make a tax-efficient entity change from S corporation status to take advantage of the new tax reform law provisions.