AICPA Comments on Adjustments Attributable to Conversions from S Corps to C Corps Under TCJA

The American Institute of CPAs (AICPA) submitted comments to the Internal Revenue Service (IRS) to address the need for guidance concerning adjustments attributable to conversions from S corporations to C corporations under section 481(d) of the Tax Cuts and Jobs Act (TCJA). These comments are in response to final regulations issued by the Department of the Treasury and the IRS on section 481(d) October 2019.

Comments previously submitted by the AICPA addressed specific issues that arise when an eligible terminated S corporation is required to change from the cash method of accounting to an accrual method of accounting as a result of the S corporation’s revocation of its election to be taxed under subchapter S. In such a circumstance, the ratable allocation period is extended from a four-year period to a six-year period and significant questions arose about the application of section 481(d) when an eligible terminated S corporation on the cash method of accounting owned a qualified subchapter S subsidiary (QSub) immediately before the S corporations revocation.

The AICPA recommends that the Treasury and IRS permit affected taxpayers to correct the tax treatment of the adoption of the accrual method of accounting by a QSub affected by an S corporation election revocation allowed under the TCJA, and that affected QSub’s be allowed to make the correction on the 2020 tax return by including a statement with the adjustment to taxable income equal to the unamortized balance of the prior adjustment amortized erroneously under section 481(d). The correcting adjustment would be included in its entirety in the taxpayer’s taxable income for the 2020 taxable year.