Most California C Corp owners assume converting to an S Corp is a complicated, risky process reserved for large companies with expensive attorneys. That assumption is costing them an average of $30,000 or more every single year in unnecessary taxes. The IRS form to convert C Corp to S Corp is a two-page document called Form 2553 — and for most small business owners, filing it is one of the highest-leverage financial decisions they will ever make.

This is not a loophole. This is a legal, IRS-sanctioned election that eliminates double taxation, unlocks the 20% Qualified Business Income (QBI) deduction, and restructures how your income flows through the business. If your California C Corp is generating $80,000 or more in annual profit, this conversion is almost certainly worth running the numbers on.

This information is current as of 3/13/2026. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.

Quick Answer: What Form Do You Use to Convert a C Corp to an S Corp?

To convert a C Corp to an S Corp, you file IRS Form 2553 (Election by a Small Business Corporation). In California, you must also file FTB Form 3560 (S Corporation Election or Termination/Revocation) with the Franchise Tax Board. These two forms work together — one at the federal level, one at the state level. Missing either one means your election is incomplete. Filing only the federal form and assuming California will automatically conform is one of the most expensive mistakes California business owners make.

Why the C Corp Structure Is Quietly Draining Your Business

C Corps pay federal corporate income tax at a flat 21% rate under current law. Then, when profits are distributed to shareholders as dividends, those same dollars are taxed again at the individual level — up to 23.8% federally (20% capital gains rate plus the 3.8% net investment income tax). California adds its own layer with a top income tax rate of 13.3% on dividends for high earners.

Run the full math on a California C Corp owner earning $200,000 in business profit:

• Federal corporate tax at 21%: $42,000
• After-tax profit available for distribution: $158,000
• Federal dividend tax (qualified) at 20%: $31,600
• California income tax on dividend at ~9.3%: $14,694
• Total tax burden: $88,294 — an effective rate of 44.1%

Now run the same $200,000 through an S Corp structure:

• Reasonable salary: $75,000
• Payroll taxes on salary (employer + employee): ~$11,475
• Distribution: $125,000 (no self-employment tax)
• Federal income tax on combined income (22-24% bracket): ~$32,000
• California income tax (~6-9%): ~$14,000
• Total tax burden: approximately $57,475 — saving $30,819 compared to C Corp

That $30,000+ gap is the reason the IRS form to convert C Corp to S Corp gets filed every year by thousands of business owners who finally ran the numbers. For a deeper strategic overview of S Corp optimization in California, see our complete guide to S Corp tax strategy in California.

IRS Form 2553: What It Is, Who Qualifies, and How to File It

Form 2553 is the official election form that tells the IRS you want your corporation taxed as an S Corp rather than a C Corp. It is not automatic. Your corporation does not become an S Corp simply because you want it to be one — you must file this form and have it accepted.

S Corp Eligibility Requirements

Before filing Form 2553, your corporation must meet all of the following IRS requirements under IRC Section 1361:

• Must be a domestic corporation (incorporated in the U.S.)
• Maximum of 100 shareholders
• All shareholders must be U.S. citizens or resident aliens (no foreign shareholders)
• Only one class of stock is permitted (though voting differences are allowed)
• Cannot be an ineligible corporation type (insurance companies, certain financial institutions, domestic international sales corporations)

If your C Corp has venture capital backing, foreign investors, or multiple stock classes, S Corp status may not be available. In that case, the C Corp structure may actually be appropriate — but the tax planning looks very different. Many business owners who don’t have those complications are leaving significant money on the table by staying in C Corp status unnecessarily.

Step-by-Step: How to Complete and File IRS Form 2553

1. Download the current Form 2553 from IRS.gov. Always use the most current version — the form is periodically updated.
2. Complete Part I (Election Information): Enter your corporation’s legal name, EIN, date incorporated, state of incorporation, and the tax year-end you want for the S Corp (typically December 31 for calendar-year filers).
3. Enter the effective date: This is the date you want S Corp status to begin. It cannot be earlier than the date you file, unless you qualify for a retroactive election (more on this below).
4. Complete the shareholder consent section: Every current shareholder must sign Form 2553 consenting to the S Corp election. Missing even one shareholder signature will invalidate the entire filing.
5. Complete Part II (Fiscal Year Election): Most business owners will leave this blank because they are using a calendar year. If you want a fiscal year, complete Part II and be prepared to justify the business purpose.
6. File the form: Mail or fax Form 2553 to the appropriate IRS Service Center based on your state. California filers typically mail to the Ogden, UT service center. Check current IRS instructions for the correct address.

Pro Tip: Always send Form 2553 via certified mail with return receipt or via IRS-approved fax with a confirmation sheet. The IRS has been known to lose forms, and if you cannot prove you filed, you will have no S Corp election to stand on.

California’s Additional Requirement: FTB Form 3560

This is where many California business owners get blindsided. Filing IRS Form 2553 alone does NOT make you an S Corp in California. The California Franchise Tax Board does not automatically conform to the federal S Corp election. You must separately file FTB Form 3560 to register your S Corp election with the state.

Key Differences Between Federal and California S Corp Treatment

Factor	Federal (IRS)	California (FTB)
Election Form	Form 2553	FTB Form 3560
Franchise Tax Rate	Pass-through (no entity tax)	1.5% of net income (minimum $800)
QBI Deduction	20% deduction available	California does NOT conform — no state deduction
Annual Minimum Tax	None	$800 minimum franchise tax
Bonus Depreciation	Full federal rates	California does not conform — limited deduction

The FTB Form 3560 must be filed alongside your first California S Corp tax return (Form 100S). Our entity formation services include full guidance on both the federal and California filings to ensure your election is airtight at every level.

The Built-In Gains Tax: The Most Expensive Trap in the C-to-S Conversion

Here is what most accountants do not explain clearly enough. When you convert a C Corp to an S Corp, the IRS does not simply forgive all the unrealized gains that accumulated while you were a C Corp. Those gains are subject to the Built-In Gains (BIG) Tax under IRC Section 1374.

How the Built-In Gains Tax Works

If your C Corp has appreciated assets — real estate, equipment, intangibles, client contracts — those assets carry a built-in gain equal to the difference between their fair market value on the conversion date and their tax basis. If you sell those assets within five years of the S Corp election, the gain attributable to the C Corp period is taxed at the highest corporate rate (currently 21%) at the entity level, in addition to any shareholder-level tax.

Example: Your C Corp owns commercial property with a $400,000 fair market value and a $100,000 tax basis. The built-in gain is $300,000. If you sell that property within five years of converting to an S Corp, the IRS will assess a 21% BIG tax on the $300,000 gain ($63,000) at the corporate level, even though you are now an S Corp.

After year five, the BIG tax window closes permanently. This is why timing the conversion — and holding appreciated assets through the recognition period — is a critical part of the tax planning process.

KDA Case Study: Sacramento Tech Consultant Saves $28,400 in Year One

A Sacramento-based IT consulting firm had been operating as a C Corp for six years. The owner was taking a $120,000 salary and distributing the remaining $110,000 in profits as dividends. His combined federal and California tax burden on those dividends was exceeding $45,000 annually — on top of his personal income tax on the salary.

KDA conducted a full entity analysis and identified that the business had no foreign shareholders, no VC-backed equity structure, and no assets with significant built-in gains. The firm was a textbook S Corp candidate.

KDA filed Form 2553 and FTB Form 3560 simultaneously, electing S Corp status effective January 1st of the current tax year. The owner restructured his compensation to a $90,000 reasonable salary with $140,000 in distributions. The results:

• Self-employment tax savings on $140,000 in distributions: $19,600
• California franchise tax reduction (from 8.84% C Corp rate to 1.5% S Corp rate): $8,140
• Federal QBI deduction on $140,000: 20% = $28,000 deduction, saving ~$6,720
• Total first-year tax savings: $34,460
• KDA fee: $6,000
• First-year ROI: 5.7x

The built-in gains analysis confirmed no appreciated assets would be sold within the five-year recognition window, making the conversion clean and penalty-free.

Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.

Filing Deadlines: When Must You File Form 2553?

Timing matters enormously with the S Corp election. Missing the deadline means staying a C Corp for another full tax year — and paying all the taxes that come with it.

Standard Filing Deadline

To elect S Corp status for the current tax year, you must file Form 2553 by the 15th day of the 3rd month of the tax year. For calendar-year corporations, that is March 15th. If you miss that deadline, your S Corp election will take effect on January 1st of the following year.

Late Election Relief: Revenue Procedure 2013-30

If you missed the deadline, you may not be out of options. Under IRS Revenue Procedure 2013-30, the IRS grants automatic relief for late S Corp elections in many cases. To qualify, you must:

• Show that the failure to file on time was due to reasonable cause
• Have filed all returns consistent with S Corp status (or be filing them simultaneously with the late election request)
• Not have intentionally missed the deadline to gain a tax benefit

Late relief elections must be filed within 3 years and 75 days of the intended effective date. Many California business owners successfully obtain late elections going back two to three years, recovering significant overpaid taxes. According to IRS Publication 542, the election requirements and timing rules are specific and must be followed precisely to avoid rejection.

Five Common Mistakes That Get Form 2553 Rejected

The IRS rejects Form 2553 filings more often than most business owners realize. Here are the most common errors and how to avoid them.

Mistake 1: Missing Shareholder Signatures

Every shareholder who held stock during the election period must sign the consent portion of Form 2553. If a shareholder sold shares mid-year, they may still need to sign. Missing even one signature invalidates the entire election.

Mistake 2: Wrong Effective Date

The S Corp election effective date cannot be retroactive beyond the IRS-allowable relief window. If you write in an effective date that predates your filing by more than the allowable period without using the late relief procedure, the IRS will reject the election.

Mistake 3: Incorrect EIN on the Form

The EIN on Form 2553 must exactly match the EIN on file with the IRS for your corporation. A single digit transposition will cause the IRS processing system to flag the form for rejection or additional review, adding weeks or months to the process.

Mistake 4: Filing Only the Federal Form (Forgetting FTB Form 3560)

As described above, California requires its own separate election. Business owners who file Form 2553 and assume California will automatically honor the federal election will find themselves operating as a C Corp in California for the entire year, paying the 8.84% franchise tax instead of the 1.5% S Corp rate.

Mistake 5: Not Establishing a Reasonable Salary Before Distributions

The S Corp election does not eliminate payroll obligations. You must pay yourself a reasonable salary before taking distributions. If the IRS determines your salary is unreasonably low, they will reclassify your distributions as wages and assess back payroll taxes, penalties, and interest. The IRS guidance on S Corp compensation makes clear that “reasonable” is based on market compensation for your role and industry.

What Happens After the Election Is Approved?

Once the IRS accepts your Form 2553, you will receive a CP261 notice confirming your S Corp election. This is your official confirmation — keep it in your permanent business records.

From that point forward, your corporation must:

• File Form 1120-S annually (due March 15th, or September 15th with extension)
• File California Form 100S annually with the FTB
• Issue Schedule K-1 to each shareholder reporting their pro-rata share of income, losses, deductions, and credits
• Run payroll and issue W-2s to any shareholders who are active in the business
• Pay the California $800 minimum franchise tax annually
• Opt into the AB 150 Pass-Through Entity (PTE) elective tax annually if eligible — this gives California S Corp owners a workaround to deduct state taxes beyond the $40,000 SALT cap

Should You Convert? A Decision Framework

Convert to S Corp if:

• Your business generates $80,000 or more in annual profit
• You have 100 or fewer U.S. shareholders
• You have no VC investors requiring preferred shares
• You have no significant appreciated assets that will be sold within five years
• You are willing to run payroll and pay yourself a reasonable salary

Stay C Corp if:

• You plan to raise institutional venture capital
• You have foreign shareholders
• You have significant appreciated assets that will be sold within five years
• You are positioning for a QSBS exclusion under IRC Section 1202 (which requires C Corp status)
• You intend to retain large amounts of earnings for reinvestment at the 21% corporate rate

Use this small business tax calculator to estimate your current tax burden and see what your numbers might look like after an S Corp election.

Frequently Asked Questions About the C Corp to S Corp Conversion

Can I convert a C Corp to an S Corp in the middle of the year?

Yes, but only if you file Form 2553 within the first two months and fifteen days of the tax year. After that point, the election will take effect on January 1st of the following year. Mid-year elections create a split tax year, which can complicate accounting and tax filings significantly.

Do I need to dissolve my C Corp and form a new S Corp?

No. The C Corp structure itself does not change — you are still incorporated the same way. The only thing that changes is the tax treatment. You remain the same legal entity; you are simply electing to be taxed as an S Corp rather than a C Corp. No new incorporation or dissolution is required.

What is the cost to convert a C Corp to an S Corp?

The IRS does not charge a filing fee for Form 2553. California does not charge a fee for FTB Form 3560. The cost is the professional fee charged by a CPA or tax strategist to properly structure the election, establish the reasonable salary, and implement the full compliance plan. At KDA, this typically ranges from $3,000 to $8,000 depending on complexity — with first-year tax savings that frequently exceed ten times that investment.

Can I switch back to a C Corp after electing S Corp status?

Yes, but not immediately. Once you revoke an S Corp election, the IRS generally prohibits you from re-electing S Corp status for five years. This five-year lockout period means that converting back and forth is rarely a viable strategy. The decision should be made carefully and with long-term planning in mind.

Will the IRS audit me if I convert from a C Corp to an S Corp?

The conversion itself does not trigger an audit. However, the IRS does scrutinize S Corps for two specific issues: unreasonably low officer compensation (salary) and passive income thresholds. If your S Corp has passive income exceeding 25% of gross receipts for three consecutive years after converting from a C Corp with retained earnings, the IRS may terminate your S Corp election. A qualified tax strategist will help you avoid both triggers.

Book Your Tax Strategy Session

Filing the IRS form to convert C Corp to S Corp is a two-page decision that can save your business $20,000 to $50,000 every year going forward. But the form is only as good as the planning behind it. The reasonable salary, the built-in gains analysis, the California FTB filing, the AB 150 PTE election, the payroll setup — every piece has to work together, or the IRS and FTB will find the gaps. If your California C Corp is generating real profit and you have not run the S Corp conversion numbers yet, that analysis alone could be worth more than anything else on your tax agenda this year. Book a personalized consultation with our strategy team and walk away knowing exactly what your conversion would save — and whether the timing is right to act now. Click here to book your consultation now.