Summary of What This Blog Covers:
- Understand the Risks of Premature Tax Elections: This blog explains how choosing an S-Corp or C-Corp structure too early or without a proper tax strategy can lead to higher taxes, unnecessary payroll costs, and compliance burdens that many small business owners aren’t ready for.
- Learn How to Reverse or Fix a Misaligned Tax Election: You’ll discover step-by-step instructions for revoking an S-Corp election, switching from C-Corp to S-Corp, or returning to LLC taxation with guidance on deadlines, IRS forms, and when to work with a licensed CPA or enrolled agent.
- Explore Restructuring and Strategic Alternatives: The blog covers how to restructure your business using IRS-approved strategies like Section 368 reorganizations, and how a CPA firm in Austin, Texas can help realign your accounting, payroll, and entity setup without triggering costly tax consequences.
- Build a Tax Structure That Supports Your Growth: It emphasizes why working with a proactive, certified public accountant such as a small business CPA in Austin can help you avoid overpaying in taxes, maximize deductions, stay compliant with FBAR filing and 1099 form reporting, and ultimately grow with confidence.
A smart business owner’s guide to untangling premature tax elections, minimizing damage, and rebuilding with confidence.
So, let’s be real for a second.
You started your business. You were hungry, hopeful, maybe even flying blind a little (who wasn’t?). And somewhere between setting up your website and landing your first few clients, someone—maybe your cousin, your banker, a lawyer, or a formation service—told you: “File as an S-Corp. It’ll save you money!”
It sounded great at the time. Maybe you hit “submit” on the IRS Form 2553 before your business even had consistent revenue. Fast-forward to today: you’re buried in payroll admin, you’re paying more in compliance costs than you’re saving in taxes, and that “smart move” now feels more like a trap.
If that’s where you are, you’re not alone. At Insogna CPA, an elite CPA firm in Austin, Texas, we’ve seen this movie more times than we can count. And the good news? There’s still time to rewrite the ending.
Let’s Start with the Basics: What Is a Tax Election?
A tax election is a formal decision you make about how your business is taxed under federal law. Think of it like a “choose-your-own-adventure” for how the IRS sees your profits. Common tax elections include:
- S-Corporation (S-Corp) Election – Passes profits through to shareholders but requires payroll and strict compliance
- C-Corporation (C-Corp) Election – The default for corporations; profits are taxed at the corporate level, and again when distributed as dividends (aka double taxation)
- Disregarded Entity (Sole Proprietor) – For single-member LLCs that report income on Schedule C
- Partnership Taxation – For multi-member LLCs unless another election is made
The trouble is, making the wrong election or making one too soon can increase your tax burden, compliance complexity, and risk of audit.
Why Early Tax Elections Happen (and Why They’re Often Wrong)
When you’re first starting out, the tax code isn’t exactly light reading. You likely made a tax election based on:
- Advice from a friend who meant well but didn’t know your numbers
- A business formation service that pre-selected an S-Corp without asking how much money you make
- A quick Google search that sold S-Corps as a “must” without the fine print
- A desire to “do it right” without knowing what “right” looks like for your business
Here’s the harsh truth: S-Corps are amazing for the right business but damaging for the wrong one.
For example:
- If you’re not consistently netting $80,000–$100,000 in profit, you may spend more on payroll software, CPA services, and compliance than you save in taxes.
- If you elect C-Corp status, you could face double taxation, especially if you’re taking distributions instead of a W-2 salary.
- If you’re missing FBAR or international compliance needs due to an overly simplified structure, the penalties can be massive.
Bottom line: without a tax strategy, your election can turn from a smart idea into a financial anchor.
Step 1: Can You Change Your Tax Election?
Yes, but timing is everything.
Revoking an S-Corp Election
If you made an S-Corp election and now regret it, the IRS allows you to revoke it by March 15 of the current tax year. This keeps the change effective for that same year.
But if you miss that deadline? You may have to:
- Wait until next year
- Explore late revocation relief, which involves explaining reasonable cause
- Consider a structural workaround (more on that below)
Changing from C-Corp to S-Corp
You must file Form 2553 within 75 days of the start of the tax year. This is great if you’re early in the year and ready to make a more tax-efficient switch.
Going from S-Corp Back to LLC
If your business no longer fits the S-Corp mold, you can:
- Revoke your S-Corp election (with notice to the IRS and shareholders)
- Resume LLC taxation as a disregarded entity (Schedule C) or partnership
- Work with a certified public accountant near you to stay compliant during the switch
For late changes or more complex scenarios, you’ll want guidance from a licensed CPA or enrolled agent familiar with IRS rulings and compliance procedures.
Step 2: Run a Full Tax Strategy Analysis
This is not a DIY job. Before you pull the plug on your current tax status, you need to understand what it’s costing you and what the alternatives could save.
At Insogna CPA, our tax advisors offer comprehensive strategy reviews that include:
- Side-by-side tax simulations for different structures
- Forecasted self-employment tax vs. payroll tax vs. corporate tax
- Entity-specific deductions you may be missing (like retirement plans or health insurance)
- Review of your 1099 form reporting, W9 tax form compliance, and payroll setup
- Assessment of any FBAR filing or international income reporting obligations
Think of it like a financial x-ray. You can’t treat what you don’t diagnose. And you don’t want to jump to a new structure that brings a different set of issues.
Step 3: Consider a Strategic Restructure
If you missed the IRS windows or your business has grown beyond the limits of your current election, a business restructure might be your best path forward.
What That Could Involve:
- Dissolving and reforming under a new EIN and legal entity
- Filing a new tax election timed properly with the start of your fiscal year
- Leveraging an IRC Section 368 tax-free reorganization to transfer assets while minimizing tax liability
- Cleaning up your accounting system, books, payroll and internal processes
And yes, it sounds complex. Because it is. But with the right Austin tax accountant, it’s entirely manageable. We’ve helped businesses pivot their structure, reduce their taxes, and restore financial clarity—all while staying compliant.
Step 4: File the Paperwork and Align Your Systems
Once the decision is made, it’s time to execute.
Here’s What Needs to Happen:
- File the IRS forms (2553, revocations, elections, etc.)
- Update your bookkeeping and chart of accounts in QuickBooks or your accounting platform
- Notify state authorities if your business address, registration, or entity type changes
- Adjust payroll providers, retirement plans, or fringe benefits if necessary
- Review any 1099-NEC, 1099-K, or W-2 reporting obligations for accuracy
At Insogna CPA, we offer end-to-end implementation, including filing, documentation, and state-level coordination so you can focus on growing your business, not chasing forms.
Bonus: The Cost of Doing Nothing
Many business owners assume that changing their tax election is too hard, too late, or not worth it.
Here’s what that mindset really costs you:
- Overpaying taxes by $5,000–$15,000 annually
- Losing access to key deductions (like QBI or retirement contributions)
- Dealing with compliance audits or penalties
- Paying for unnecessary payroll systems
- Staying in a structure that doesn’t support your growth
Let’s not forget: taxes aren’t just about what you owe, they’re about how you build wealth. A better tax structure isn’t just about fixing a mistake. It’s about giving your business the financial structure it deserves.
Final Thoughts: Don’t Let a Bad Tax Election Define Your Business
We get it. You were doing your best with the info you had. But now? You’ve got new data. You’ve got better options. And you’ve got a CPA team ready to help you course-correct with clarity and confidence.
Whether you’re stuck in an S-Corp you’ve outgrown or struggling with C-Corp compliance, the solution isn’t to wait, it’s to act.
At Insogna CPA, We Help You:
- Identify and correct mismatched tax elections
- Run real-time tax planning and entity comparisons
- Align your structure with your business model and growth stage
- Support FBAR filing, 1099 form reporting, and multi-entity planning
- Offer proactive support from a certified CPA in Austin, Texas who works with you year-round
We’re not just here to fix the past, we’re here to help you design the future.
Ready to Make Your Tax Election Work for You?
Whether you’re searching for a CPA near you, an experienced Austin accounting firm, or a proactive tax advisor in Austin, we’re ready to help.
Book a strategy session today with Insogna CPA, your go-to team for entity structure, tax optimization, and business clarity.
Because tax mistakes happen. The real mistake? Not fixing them.