Last year, the Tax Cuts and Jobs Act made dramatic revisions the rates of business taxes. Notably, it cut the top tax rate for C corporations from 35 percent to a mere 21 percent, and gave S corporations a 20 percent tax deduction. This change has prompted some companies currently structured as S corporations to become C corporations instead.
Recently, the Internal Revenue Service issued Revenue Procedure 2018-44, a procedure addressing how former S corps that transitioned to C corps should change their method of accounting. In this post, we will examine the IRS’s new procedures so that businesses can modify their accounting methods accordingly.
Two modified revenue procedures
The IRS’s Revenue Procedure 2018-44 contains two major modifications from earlier revenue procedures.
First, a newly-created C corporation that is transitioning from the overall cash method to an overall accrual method and makes this change within the first taxable year should take into account the 481(a) adjustment for the next six-year period.
Second, a terminated S corporation that can continue using the cash method of accounting but switches to the accrual method can take into account the 481(a) adjustment during the following six-year period, beginning with the first taxable year.
Transitioning from an S corp to a C corp
Making the switch from an S corporation to a C corporation, while lucrative, can also be complex and detail-heavy. Some companies end up making an accounting or tax error that results in expensive civil penalties. These mistakes are common enough, but they are easy to avoid if a business changes its type of structure correctly. For businesses as well as individuals, it is wise to work with a professional who has extensive experience with business formation, tax planning and Georgia law.