A “Sample Letter To Terminate An S Election” is a document. It tells the IRS you’re ending your S corp status. Businesses use it when they no longer want to be taxed as an S corp.
Need to write one? We get it. It can be tricky. That’s why we’re here to help.
We’re sharing letter templates. These samples make writing your termination letter easier. Let’s get started.
Sample Letter To Terminate An S Election
[Your Name]
[Your Address]
[Your City, State, Zip Code]
[Date]
Internal Revenue Service
[IRS Address]
[IRS City, State, Zip Code]
**Subject: Termination of S Election for [Your Company Name], EIN: [Your Company EIN]**
Dear Internal Revenue Service,
This letter serves as formal notification that [Your Company Name], with Employer Identification Number (EIN) [Your Company EIN], is terminating its S corporation election, effective [Date of Termination].
The decision to terminate the S election was made by [Shareholder Vote/Decision-Making Process] on [Date of Decision]. [Optional: Briefly state the reason for termination, e.g., “This decision was made due to changes in the company’s operational structure.”].
We understand that this termination will result in [Your Company Name] being treated as a C corporation for federal income tax purposes, beginning [Date of Termination].
We request confirmation of this termination in writing. Please send any correspondence regarding this matter to the address listed above.
Sincerely,
[Your Name/Company Officer Name]
[Your Title]
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How to Write a Letter to Terminate an S Election
Subject Line: Clarity from the Outset
The subject line should be concise yet comprehensive. It’s the initial flag signaling the letter’s purpose. Avoid ambiguity; get straight to the point.
- Example: “S Corporation Election Termination – [Company Name]”
- Include the phrase “S Corporation Election Termination” to ensure prompt categorization.
- Append the company’s name for easy identification.
Salutation: A Professional Overture
Begin with a formal salutation. Politeness is paramount, even when initiating a termination.
- Address the Internal Revenue Service (IRS) directly.
- Use “Dear Internal Revenue Service” or “To Whom It May Concern.”
- Avoid informal greetings or colloquialisms.
Identification: Pinpointing the Entity
Clearly identify the S corporation seeking termination. This section anchors the request to a specific entity, preventing misinterpretations.
- State the full legal name of the S corporation.
- Provide the Employer Identification Number (EIN).
- Include the corporation’s address.
Declaration of Intent: The Core Statement
Explicitly state the intent to terminate the S corporation election. This declaration forms the crux of the letter.
- Use unambiguous language like, “This letter serves as formal notification of our intent to terminate the S corporation election.”
- Specify the effective date of the termination. This is crucial for compliance.
- Reference the relevant IRS code section, if known, to bolster the declaration’s legitimacy.
Reason for Termination: Providing Context
While not strictly mandated, offering a brief explanation can expedite processing. Transparency fosters understanding.
- State the primary reason for termination, e.g., “Due to a change in business structure” or “Sale of the business.”
- Keep the explanation succinct and factual. Avoid verbose narratives.
- If shareholder consent is required, mention that it has been obtained.
Shareholder Consent (If Applicable): Ensuring Agreement
If termination requires shareholder consent, explicitly state that the requisite consent has been secured. This provides assurance of compliance.
- Include a statement like, “All shareholders have consented to this termination in accordance with IRS regulations.”
- Consider attaching copies of shareholder resolutions or consent forms as corroborating evidence.
- Specify the percentage of shares consenting, if applicable.
Closing: A Cordial Conclusion
End the letter with a professional closing. Courtesy leaves a lasting impression.
- Use a formal closing such as “Sincerely” or “Respectfully.”
- Include the name and title of the authorized representative signing the letter.
- Provide contact information (phone number and email address) for follow-up inquiries.
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Frequently Asked Questions: Terminating an S Election
Terminating an S election is a significant decision for any business. This section addresses common inquiries regarding the process and implications of such a termination.
What is an S election termination?
An S election termination signifies the end of a corporation’s status as a pass-through entity for federal income tax purposes, reverting to taxation under Subchapter C of the Internal Revenue Code.
Why would a corporation choose to terminate its S election?
Reasons for termination may include changes in ownership structure, anticipation of corporate losses that cannot be utilized by shareholders, or strategic advantages associated with C corporation tax treatment.
What are the methods for terminating an S election?
Termination can occur voluntarily through shareholder consent, involuntarily due to failure to meet S corporation eligibility requirements, or automatically if passive investment income exceeds prescribed limits for three consecutive years.
What information should be included in a sample letter to terminate an S election?
The letter should clearly state the corporation’s intent to terminate the S election, the effective date of termination, the corporation’s name, address, and employer identification number (EIN), and be signed by shareholders holding more than 50% of the stock.
What are the tax implications following the termination of an S election?
After termination, the corporation is taxed as a C corporation, subject to corporate income tax rates. Dividends paid to shareholders are taxable at the shareholder level, potentially leading to double taxation.