You elected S Corp status, ran into problems, reverted to a C Corp, and now you want back in. The question most California business owners ask at this point is: can a C Corp reelect S Corp status, and if so, how long do you have to wait? The answer matters more than most people realize — and getting it wrong means staying in C Corp tax territory longer than necessary, often costing $20,000 to $40,000 in unnecessary taxes per year.

Here is what the IRS actually says, what California’s Franchise Tax Board (FTB) adds on top, and exactly how to engineer a clean re-election without triggering the 5-year lockout that kills this strategy for unprepared business owners.

Quick Answer: Can a C Corp Reelect S Corp Status?

Yes, a C Corp that previously held S Corp status can re-elect S Corp treatment — but under IRC Section 1362(g), the corporation must wait five years from the tax year in which the original S election was terminated before it can re-elect, unless the IRS grants consent to an earlier election. That five-year waiting period is the rule most business owners overlook. It is not a suggestion. It is a hard statutory bar, and the IRS enforces it without exception unless you file for early relief.

The good news: IRS consent to waive the five-year waiting period is granted more often than people think — provided your termination was not a deliberate tax avoidance move and you can demonstrate a legitimate business reason for the re-election.

Why the Five-Year Waiting Period Exists (And When the IRS Will Waive It)

Congress built the five-year rule under IRC Section 1362(g) to prevent businesses from gaming the tax code — flipping between S Corp and C Corp status to cherry-pick favorable tax years. The concern was real: a business could use S Corp flow-through treatment in profitable years and then revert to C Corp status during loss years to absorb those losses at the corporate level. The five-year rule eliminated this strategy.

But the IRS also knows that legitimate businesses sometimes terminate their S elections for entirely valid, non-tax reasons. Here are the most common scenarios where early consent gets approved:

• Inadvertent termination — You accidentally exceeded 100 shareholders, added a nonresident alien shareholder, or issued a second class of stock without realizing it disqualified your S status. Under IRC Section 1362(f), the IRS can treat the termination as inadvertent and restore S Corp status retroactively.
• Change in business structure — A merger, acquisition, or restructuring caused the S Corp disqualification, not a deliberate tax election.
• New ownership — The prior owners terminated S status; new owners purchased the company and want to restore it under entirely different economics.
• Entity conversion — The business converted from S Corp to C Corp for a VC funding round (many institutional investors require C Corp status), completed its capital raise, and now wants to return to pass-through treatment.

To request early consent, you file a private letter ruling (PLR) request with the IRS National Office, accompanied by a detailed factual statement and payment of the user fee (currently $30,000 for most business filers). That sounds expensive — and it is — but if avoiding five years of C Corp double taxation saves $25,000 per year, the PLR cost pays for itself in less than 18 months.

The S Corp Re-Election Filing Process: Step by Step

Assuming you have either waited out the five-year period or obtained IRS consent, here is the exact sequence for re-electing S Corp status in California. Many business owners miss a step here and end up with a valid federal S election but no corresponding California recognition — which is a significant problem because California taxes do not follow the federal treatment automatically.

Step 1: File IRS Form 2553 with the IRS

Form 2553, Election by a Small Business Corporation, is the federal filing that converts your C Corp to S Corp status for federal tax purposes. To be effective for the current tax year, it must be filed no later than two months and 15 days after the beginning of the tax year in which you want the election to take effect. For a calendar-year corporation wanting S Corp status in 2026, the deadline was March 15, 2026. If you missed it, the election will apply to the 2027 tax year unless you qualify for late election relief under Rev. Proc. 2013-30.

Step 2: File California FTB Form 3560

California does not automatically recognize a federal S Corp election. You must separately file FTB Form 3560, S Corporation Election or Termination/Revocation, with the California Franchise Tax Board. This is a step that a startling number of business owners and even some tax preparers skip. The result is a corporation that is taxed as an S Corp federally but remains a C Corp for California purposes — meaning you pay California’s 8.84% corporate franchise tax instead of the 1.5% S Corp rate.

Step 3: Notify All Shareholders

All shareholders must consent to the S Corp election by signing Form 2553 or attaching a written statement of consent. If you are re-electing after a termination, every current shareholder must sign — not just the original shareholders who consented to the initial election. New shareholders acquired after the termination also need to consent.

Step 4: Establish Reasonable Compensation

Before your first payroll under S Corp status, document a reasonable salary for any shareholder-employee. The IRS scrutinizes S Corps specifically because owner-operators sometimes pay themselves $1 in salary to avoid payroll taxes and take all profits as distributions. The IRS will reclassify unreasonably low salaries as wages and assess back payroll taxes plus penalties. A defensible salary is generally the amount you would pay a third party to perform your role — typically 40% to 60% of total compensation for most single-owner service businesses.

Step 5: Update Payroll and Accounting Systems

Once re-elected, you must run payroll through a proper payroll system, withhold federal and California income taxes, and file quarterly payroll returns (Form 941 federally, DE 9 and DE 9C in California). Your bookkeeping also needs to track shareholder basis carefully — a number that determines how much of your S Corp losses you can deduct and the tax treatment of distributions.

KDA Case Study: Torrance Consultant Saves $28,900 in Year One After C Corp Re-Election

A management consultant in Torrance, California had originally elected S Corp status in 2018 but terminated the election in 2021 when she brought on a foreign investor — which disqualified her corporation from S Corp treatment. By 2024, the foreign investor had exited. She came to KDA in early 2025 wanting to know if she could get back into S Corp treatment without waiting until 2027.

Her situation: $280,000 in annual net business income, filing as a C Corp and paying California’s 8.84% corporate franchise tax plus 20% federal dividend tax on any distribution — an effective combined rate north of 49% on distributed profits.

KDA analyzed the termination history and confirmed that the 2021 termination was triggered by a disqualifying shareholder event — precisely the kind of inadvertent termination addressed under IRC Section 1362(f). We prepared a comprehensive request for IRS consent to early re-election, documenting that the termination was not motivated by tax avoidance and that the disqualifying shareholder had fully exited the corporation.

The IRS granted consent. KDA filed Form 2553 and FTB Form 3560 simultaneously, effective January 1, 2025. In year one, the client’s total tax on $280,000 in income dropped from approximately $97,500 under C Corp treatment to $68,600 under S Corp treatment — a first-year savings of $28,900. KDA’s advisory fee for the engagement: $5,200. That is a 5.6x first-year ROI.

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.

The Built-In Gains Tax: The Trap Nobody Warns You About When Re-Electing

Here is the part most business owners do not hear until it is too late. When a C Corp re-elects S Corp status, the IRS does not simply forget that the corporation was once a C Corp. Under IRC Section 1374, any assets that the corporation held at the time of the S Corp re-election — and that had appreciated in value while the corporation was a C Corp — are subject to the Built-In Gains (BIG) tax if sold within five years of the re-election date.

The BIG tax is assessed at the highest corporate rate (currently 21% federally) on any recognized gain that was built into assets at the time of conversion. This is a second layer of corporate-level tax, paid by the S Corp itself — not the shareholders — before any remaining gain flows through to the owners.

Which Assets Trigger the BIG Tax?

• Real estate held at the time of re-election that has appreciated
• Equipment or vehicles with fair market value exceeding adjusted tax basis
• Accounts receivable that existed at re-election (for cash-basis C Corps converting to accrual)
• Goodwill and intangible assets embedded in the business
• Inventory with built-in appreciation

How to Manage BIG Tax Exposure

The primary defense is timing. If you can wait out the five-year recognition period before selling appreciated assets, the BIG tax does not apply. For real estate, this often means holding the property as an investment rather than selling in the years immediately following re-election. For business assets, it means carefully evaluating any planned equipment upgrades or business sales against the BIG tax exposure.

A detailed BIG tax analysis should be completed before re-electing. KDA routinely prepares a “BIG tax inventory” for every C Corp converting to S Corp status — a document that identifies every asset subject to potential BIG tax, quantifies the exposure, and maps out a holding strategy to minimize or eliminate it.

For a complete breakdown of S Corp strategies available to California business owners, see our comprehensive S Corp tax strategy guide covering elections, salary planning, distributions, and exit planning.

California-Specific Considerations for S Corp Re-Election

California adds two layers of complexity that do not exist at the federal level.

The California Franchise Tax Differential

California taxes C Corps at 8.84% of net income. California taxes S Corps at 1.5% of net income — plus the $800 annual minimum franchise tax. On $200,000 in net income, that is a $14,680 annual difference in state franchise tax alone. Over five years at the C Corp rate, that differential compounds to over $73,000 in excess California franchise taxes — before any federal tax impact. This is why the timing of your re-election matters so much in California specifically.

The AB 150 Pass-Through Entity (PTE) Election

California’s AB 150 allows S Corps to pay California income tax at the entity level and take a corresponding federal deduction, effectively bypassing the $10,000 federal SALT deduction cap. For California S Corp owners in the 37% federal bracket, this election can save an additional $10,000 to $20,000 per year on top of standard S Corp savings. But the AB 150 election is available only to qualifying S Corps — another reason why getting your re-election right matters.

You can estimate how much your California S Corp structure will save using this small business tax calculator to model different income and entity scenarios before committing to the re-election.

The FTB Form 3560 Timing Issue

California requires FTB Form 3560 to be filed with the FTB no later than the due date of the corporation’s first S Corp return. If you file Form 2553 with the IRS in January 2026 but fail to file FTB Form 3560 until December 2026, California may not recognize S Corp status retroactively — and you may owe C Corp franchise tax for the entire year. The safe approach is to file both forms simultaneously and send both via certified mail with return receipt.

The Most Common Re-Election Mistakes and How to Avoid Them

Our entity formation services team has reviewed dozens of botched S Corp re-elections over the years. These are the errors that show up most frequently.

Mistake 1: Filing Without Checking the Five-Year Clock

Business owners sometimes assume they can simply re-file Form 2553 without checking when their original S election terminated. The five-year waiting period begins in the tax year of termination — not the calendar year you filed the termination form. If your S election terminated mid-year, the waiting period begins with that full tax year.

Mistake 2: Ignoring the BIG Tax Inventory

Re-electing without documenting the fair market value of all corporate assets on the re-election date creates enormous problems later. If you sell an asset five years after re-election, you cannot establish which portion of the gain was built-in at conversion without contemporaneous documentation. The IRS will use whatever valuation disadvantages the taxpayer most.

Mistake 3: Skipping California FTB Form 3560

Already covered above, but worth repeating: the FTB does not automatically recognize your federal S election. File Form 3560 separately, timely, and keep certified mail receipts.

Mistake 4: Setting an Unreasonably Low Salary Immediately

IRS audit rates for S Corps have increased in recent years, with particular focus on compensation reasonableness. Do not set a $1 salary or a token $10,000 salary on $400,000 in business income. Document your salary using industry compensation data — the RCReports or BizMiner compensation analysis tools are both IRS-acceptable benchmarking sources.

Mistake 5: Distributing Accumulated E&P Without a Tax Plan

If your C Corp accumulated earnings and profits (E&P) during the years it operated as a C Corp, those E&P balances carry over into the new S Corp. Distributions that come from accumulated C Corp E&P are taxed as dividends — not as tax-free S Corp distributions from the accumulated adjustments account (AAA). If you plan to distribute significant cash shortly after re-electing, you need a careful E&P analysis to determine the tax treatment before writing any checks.

Is Re-Electing S Corp Status Worth It? The Math at Three Income Levels

Here is a straightforward comparison for a California single-owner C Corp versus S Corp at three income levels, using 2026 rates (21% federal corporate rate, 8.84% California corporate rate, 37% federal individual rate, 13.3% California individual rate):

Net Profit	C Corp Total Tax (Distributed)	S Corp Total Tax	Annual Savings
$150,000	~$78,400	~$54,200	$24,200
$250,000	~$130,700	~$91,500	$39,200
$400,000	~$208,800	~$153,100	$55,700

These figures assume full distribution of after-tax corporate profits for the C Corp scenario and a 40% reasonable salary split for the S Corp scenario. The actual numbers will vary based on your specific deductions, payroll costs, and California AB 150 elections — but the directional difference is consistent across all income levels above $80,000.

Frequently Asked Questions About C Corp Re-Election to S Corp

What if my S Corp termination was accidental?

If your S election was terminated by an inadvertent disqualifying event — such as accidentally adding a prohibited shareholder — you may qualify for retroactive restoration under IRC Section 1362(f) without serving any waiting period at all. The IRS evaluates inadvertent termination relief on a case-by-case basis, and the standard is whether the termination was unintentional and whether the corporation took corrective steps promptly upon discovery. This is one of the most powerful and underused provisions in S Corp law.

Can I re-elect S Corp status if I currently have an LLC taxed as a C Corp?

If your LLC has elected to be taxed as a corporation (by filing Form 8832) and subsequently filed Form 2553 to be treated as an S Corp, and then revoked the S election, the five-year rule still applies. The entity type (LLC vs. corporation) does not change the timing rules — what matters is the tax election history.

How do I know if my original S Corp termination was voluntary or involuntary?

A voluntary termination occurs when shareholders holding more than 50% of the S Corp’s stock consent in writing to revoke the S election. An involuntary termination occurs when a disqualifying event happens — wrong type of shareholder, too many shareholders, a second class of stock, etc. The distinction matters because voluntary terminations receive less sympathetic treatment from the IRS in PLR requests for early re-election than involuntary terminations do.

Does the five-year wait apply even if I sold the business and new owners want to re-elect?

Yes. The five-year waiting period runs with the corporation, not with the shareholders. Even if 100% new ownership takes over, the same entity cannot re-elect S Corp status within five years of a prior termination without IRS consent. If you are buying a C Corp that was previously an S Corp, make sure to identify when the prior S election terminated before assuming you can immediately elect S Corp status.

Red Flag Alert: The Situation Where Re-Election Backfires

There is one scenario where re-electing S Corp status is the wrong move even if you are legally eligible to do it: when your corporation has significant accumulated C Corp losses and you expect the business to become profitable in the near term.

C Corp net operating losses (NOLs) cannot flow through to shareholders. When you convert to an S Corp, those accumulated C Corp losses essentially get trapped at the corporate level and can only offset future C Corp income — income your corporation will no longer generate once it becomes an S Corp. If your C Corp has $500,000 in accumulated NOLs and you convert to an S Corp before those losses offset any income, you forfeit much of their value.

The smarter play in that scenario is to remain a C Corp until the accumulated losses are absorbed by income, then re-elect once the NOL carryforward is exhausted or substantially reduced. This is a nuanced analysis, and the right answer depends entirely on your projected income trajectory and loss carry forward amounts.

This information is current as of 3/16/2026. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.

Book Your S Corp Re-Election Strategy Session

If your C Corp used to be an S Corp and you want back in — or if you are not sure whether your prior termination qualifies for early consent — do not guess. The five-year trap, the BIG tax exposure, and the California FTB timing rules are all areas where mistakes compound quickly. Our team has engineered clean S Corp re-elections for dozens of California business owners, and we know exactly what the IRS looks for when evaluating early consent requests. Book a personalized consultation and let us build the right re-election roadmap for your specific situation. Click here to book your consultation now.