Convert LLC w/S Corp election to sole proprietorship

[2young2care]

I set up a single-member LLC in 2022 and e-filed my 2022 business taxes with my EIN and filed Form 2553 to be taxed as an S Corp. The IRS mailed my Form 2553 back to me for a wet signature. I have not sent it back to them yet.  I've decided I would rather file future returns as a sole proprietorship. Am I allowed to make that change? do I have to go back and amend my 2022 return as well?

[Rick19744]

Please respond to @Anonymous_ question on what return you filed in 2022.

[Critter-3]

Right now the IRS has not accepted your request to change to an S-Corp so if you filed your personal return already using the K-1 form issued by the 1120-S  then sign the form and return it for the 2022 return.  Then if you want to revert to the Sch C in 2024 you will file one more 1120-S form for 2023 showing the income & expenses  and checking the FINAL box. 

[2young2care]

Yes, I did file form 1120-S for 2022.

[Rick19744 · Accepted solution]

Some follow-up comments:

• I believe you have some hurdles to cross.
• Since you have never responded to the IRS request, and provided them with a completed form 2553, you technically don't have a valid S election.  
• To have a valid S election, the IRS will send you a letter of acceptance.
• Since you have already filed the form 1120-S, I am not sure what stance the IRS will take at this point in time.  This needs to be figured out before you file any 2023 returns.
  • The IRS could deny the S election.  You would then need to amend your 2022 form 1040 and possibly have some issues at the state level as well.
  • Many states require a copy of the S corp acceptance letter be attached to the first year state return.  You have not done this since you never received acceptance.
  • The IRS may accept the S election even though there has been a significant time lapse since their request.  If this is the case, then you need to file a final form 1120-S.
    • In this case, you will have a complete liquidation of the S corp assets
    • You may need to file form 1099-DIV to report liquidating distributions
    • You will need to determine gain or loss on the liquidation of the S corp
    • You will need to file any final state S corp return
• You need to send back the appropriate signed form 2553 as requested; along with a copy of the letter that was included.   The response from the IRS will then dictate the next move.
• Once you receive the response from the IRS, I would then recommend you meet with a tax professional to clean this up and get started down the right path.  Don't be penny wise and pound foolish here.  Penalties could easily be more than any professional time.

[2young2care]

Thank you! You've been very helpful and I appreciate your time!

[Rick19744]

You are welcome.