In Revenue Procedure 2018-44, the IRS modified Revenue Procedure 2018-31, 2018-22 I.R.B. 637, to add temporary rules for corporations changing from a cash to an accrual method of accounting in connection with revoking S corporation status.

Background

S corporations may generally use a cash method of accounting, whereas many C corporations must use an accrual method of accounting. Thus, when a corporation using a cash method of accounting terminates its S election, it may be required to change to an accrual method of accounting for its first C corporation year.

Congress recognized that the tax rate changes enacted under the Tax Cuts and Jobs Act might result in many S corporations electing to terminate S corporation status and, in turn, be required to change to an accrual method of accounting. In so doing, Congress added Section 481(d) to the Code, requiring eligible terminated S corporations to take into account ratably over six years, beginning with the year of change, any Section 481(a) adjustment that is attributable to the revocation of an S corporation election.

Section 481(d)(2) defines an eligible terminated S corporation as any C corporation that: (1) was an S corporation on December 21, 2017; (2) revokes its S corporation election after December 21, 2017, but before December 22, 2019; and (3) has the same shareholders, owning the corporation's stock in identical proportions on December 22, 2017, and on the date the revocation is made.

Revenue Procedure 2018-44

Revenue Procedure 2018-44 modifies Revenue Procedure 2018-31 to add temporary rules for corporations changing from a cash to an accrual method of accounting in connection with revoking S corporation status.

Revenue Procedure 2018-44 requires an eligible terminated S corporation that: (1) must change from a cash method to an accrual method of accounting as a result of a revocation of its S corporation election, and (2) makes the accounting method change for the first tax year it is a C corporation, to take into account the Section 481(a)(2) adjustment ratably during the six-year period beginning with the year of change. An eligible terminated S corporation that may continue to use the cash method after the revocation and changes to the accrual method for the first tax year it is a C corporation may also take into account the Section 481(a)(2) adjustment ratably during the six-year period beginning with the year of change.

Revenue Procedure 2018-44 only applies to a change to an accrual method of accounting and not to any other changes in method of accounting that result in adjustments required by Section 481(a) that are attributable to a corporation's revocation of its S election.

An eligible terminated S corporation that is not required to change to an accrual method of accounting for its first C corporation year, but wants to use the six-year spread, must indicate in the statement required by line 26 of Form 3115 that it is making an accounting method change with the spread period allowed under Section 15.01(3)(a)(ii)(B) of Revenue Procedure 2018-31.

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