Key Takeaways

  • Form 8832 allows LLCs and partnerships to elect corporate taxation, potentially reducing tax liabilities.
  • Eligibility is restricted to LLCs, partnerships, and certain foreign entities.
  • Effects of election can include liquidation of partnerships, dissolution of corporations, or asset reallocation.
  • Comparison to Form 2553: Form 8832 elects corporate tax treatment, whereas Form 2553 is specifically for S corporation elections.
  • Choosing a tax status can significantly impact an LLC’s tax burden.
  • S Corporation Election with Form 8832 is possible but requires specific qualifications.
  • Not all businesses should file Form 8832, including certain banks, insurance companies, and REITs.
  • No strict deadline exists, but the tax classification change is effective within specific timeframes.
  • Common mistakes include incorrectly using Form 8832 when Form 2553 is required.
  • Filing process involves completing, signing, and submitting Form 8832 to the IRS.

Form 8832 can be filed with the IRS for Partnerships and Limited Liability Companies (LLCs) if they want to be taxed as different kinds of companies, like a corporation.

Form 8832: What Is It?

Partnerships and Limited Liability Companies can file IRS Form 8832. Businesses file this form if they want to be taxed as different kinds of companies, like a corporation.

Why Is Form 8832 Important?

No business wants to pay too much in taxes. Business entities are given a default tax classification (i.e. a multi-member LLC is taxed as a partnership unless it changes its tax status). Sometimes businesses can pay thousands of dollars less in taxes, just by changing how the business is taxed!

Entities Eligible to Use Form 8832

The IRS restricts which entities are eligible to file Form 8832. Limited liability companies and partnerships are two of the most common eligible entities. Certain foreign corporations can also file this IRS form, as can foreign corporations owned in the United States in certain jurisdictions.

Limitations and Restrictions on Form 8832 Elections

While many LLCs and partnerships can use Form 8832, certain limitations apply:

  • Automatic Classification Rules: Some entities, such as single-member LLCs, are automatically classified as disregarded entities unless they elect otherwise.
  • Foreign Entities: A foreign entity’s ability to file Form 8832 depends on the country of formation and its default IRS classification.
  • State-Level Restrictions: Some states may not recognize federal tax elections, meaning an entity electing corporate status under Form 8832 may still be taxed differently at the state level.
  • Pre-existing Elections: Entities that have previously elected a classification using Form 8832 cannot change their election again for five years unless granted IRS approval.

Effects of Election

Electing a new tax status can have a big impact on your organization and the changes that your company undergoes will depend on its status prior to the new election. Learning about these different effects should help you decide if electing a new tax status is the right option for your company.

If your business is currently structured as a partnership and you elect to be treated as a corporation, your partnership will be liquidated. All of the liabilities and assets of your former partnerships will be sold for stock in the new corporation. This stock will then be distributed amongst the former partners.

When you decide to change your corporation to a partnership, the corporation will be dissolved. The assets and liabilities that were once owned by the corporation will be distributed to shareholders, who will then contribute these items to the new partnership.

A corporation that decides to be treated as a disregarded entity will allocate all of the company's assets and liabilities to one owner. Finally, when a disregarded entity that is separate from its owner decides to elect corporate tax status, the owner will contribute all obligations and assets to the corporation.

How a Change in Tax Status Affects Liability & Reporting

Changing an entity’s tax classification using Form 8832 impacts several financial and legal aspects:

  1. Tax Filing Obligations:
    • Partnerships converting to corporations must file Form 1120 (Corporate Tax Return) instead of Form 1065.
    • Single-member LLCs that elect corporate taxation must stop filing Schedule C and file Form 1120 instead.
  2. Owner Liability & Profit Distribution:
    • Partnership-to-corporation conversions limit owner liability but introduce double taxation on profits.
    • Electing disregarded entity status may simplify taxation but exposes owners to personal liability risks.
  3. Self-Employment Taxes:
    • LLC members taxed as corporations may save on self-employment taxes, as corporate dividends are not subject to self-employment tax.
  4. Employment Tax Considerations:
    • Businesses electing corporate status must ensure compliance with payroll tax rules, including withholding Social Security and Medicare taxes for employees, including owner-employees.

Form 8832 vs. Form 2553

Understanding the difference between Form 8832 and Form 2553 is of the utmost importance if you're interested in changing your business's tax status. Form 8832 can be used by a business entity that wishes to change its tax classification. So, if your business is structured as a partnership and you want to elect corporate tax status, you would use Form 8832. Form 2553 is specifically for traditional corporations that want to elect S corporation tax status.

Business entities are not required to elect a tax status, as the IRS will automatically tax businesses based on their default tax classification. You only need to use Form 8832 or 2553 if you're interested in altering your current tax classification.

Generally, non-corporation business entities will make use of Form 8832. Although it is possible to elect S corporation status using Form 8832, traditional corporations prefer to use Form 2553 to elect this status because it is made specifically for this purpose. Essentially, the form that you will use will depend on the new status that you wish to elect for your company.

Tax Implications of Choosing Between Form 8832 and Form 2553

Understanding the tax implications of choosing between Form 8832 and Form 2553 is crucial:

  • C Corporation Status via Form 8832:
    • Subject to corporate income tax (currently 21%).
    • Earnings distributed as dividends are subject to double taxation (corporate tax + dividend tax).
  • S Corporation Status via Form 2553:
    • Pass-through taxation avoids double taxation.
    • Must meet strict eligibility criteria (e.g., limited number and type of shareholders).
    • Shareholders are taxed on their allocated income, even if not distributed.
  • LLC Default Taxation:
    • Single-member LLCs pay taxes as sole proprietorships, avoiding corporate tax but subject to self-employment tax.
    • Multi-member LLCs taxed as partnerships pass income through to members, who report it on personal returns.

Choosing the Right Tax Status for Your LLC

After formation, your limited liability company (LLC) will be assigned a default tax status by the IRS. If you have formed a single-member LLC, your organization will be taxed as a sole proprietorship. On the other hand, if your company is a multi-member LLC, the IRS will treat your business as a partnership. While you could accept these default classifications, your goal should be to pick a tax status that will provide you the biggest savings.

After doing your research, you may decide that a new tax status will be beneficial for your LLC, which means you'll need to file Form 8832. By filing this form, you can choose a new classification for your business, including:

  • Sole proprietorship
  • Partnership
  • C corporation
  • S corporation

Electing a new tax status can potentially save your LLC thousands on your annual tax bill, which is why this decision is so important.

Electing S Corporation Status with Form 8832

Corporations and other entities can elect S corporation status if they can meet certain qualifications. First, to elect S corporation status, your business must either be an entity eligible for corporate tax treatment or a domestic corporation. Second, your corporation cannot have more than 100 shareholders. If your S corporation ever grows to have more than 100 shareholders, you will lose this status and be treated as a traditional corporation.

Next, only certain entities can be shareholders of an S corporation, including estates, exempt organizations, individuals, and trusts. Nonresident aliens are not allowed to be shareholders in S corporations. Unlike traditional corporations, S corporations are only allowed to have one class of stock. Certain types of corporations are ineligible for S corporation status, such as:

  • Banks that you use reserve accounting
  • Insurance companies
  • Corporations that have chosen to be treated as a possessions corporation
  • Domestic international sales corporations or former DISCs

S corporations are also required to change their tax year to one of the following:

  • A tax year that ends on December 31
  • An ownership tax year or natural business year
  • A section 444 tax year

Finally, all shareholders must consent to the S corporation election.

Special Considerations for S Corporation Elections

Before electing S corporation status, businesses must consider:

  1. Ownership Limitations: Only U.S. citizens, resident aliens, certain trusts, and estates can be shareholders.
  2. Corporate Structure: An S corporation can have only one class of stock, limiting investment structuring options.
  3. Pass-Through Taxation: Profits and losses pass directly to shareholders, avoiding corporate-level taxation but potentially increasing individual tax burdens.
  4. Tax Reporting Requirements: S corporations must file Form 1120-S and provide shareholders with Schedule K-1 for tax reporting.

Reasons to Consider Not Using Form 8832

Form 8832 can only be used by some businesses. Here are a few businesses that filing Form 8832 may not be for:

  • Insurance companies
  • State-chartered banks (if FDIC-insured)
  • U.S. or foreign corporations
  • A business owned by a state or by a foreign government
  • Tax-exempt organizations
  • Real Estate Investment Trusts (REITs)
  • Businesses that want to be taxed as S-Corporations

Reasons to Consider Using Form 8832

Partnerships and LLCs might benefit from filing Form 8832. Other businesses that may want to consider using the form are:

  • LLCs or partnerships taxed as corporations because they previously filed Form 8832
  • Foreign businesses that are associations taxed as a corporations

Deadline

There is no deadline to file Form 8832. It can be filed anytime during a businesses' lifetime.

If a business wants to change its tax classification, the filing date is important! The change in tax status for the business is effective either:

  • Up to 75 days before filing the form
  • Up to one year after filing the form
  • If no date is entered, the filing date is the effective date

Some businesses may still be able to benefit from a Form 8832 change outside of these time frames. The instructions for the form give more information about this option.

When and How to File Form 8832 for Retroactive Tax Elections

If a business wants its new tax classification to apply retroactively, it must follow specific IRS guidelines:

  • Retroactive Changes: Businesses can request retroactive tax treatment of up to 75 days before filing or up to one year after if IRS approval is granted.
  • Late Election Relief: If a business misses the deadline, it may qualify for late election relief under IRS Revenue Procedure 2009-41 by demonstrating reasonable cause for the delay.

Examples

An LLC with one member does not file Form 8832. The business will continue to be taxed as a disregarded entity.

  • Pro: Filing taxes is simpler for the owner.
  • Con: The LLC may receive better tax treatment as a Corporation.

A Partnership or an LLC with at least two members might file Form 8832 to choose corporate tax status.

  • Pro: Instead of each partner reporting their share of gains and losses, these are reported at the entity level. This may save money on taxes.
  • Con: Individual partners may prefer partnership tax status.

Common Mistakes

  • Businesses that want to change their tax classification to an S Corporation do not need to file Form 8832. Instead, they should file Form 2553.
  • When a single-member LLC adds more members, the business will be taxed as a partnership. This is true unless the business files Form 8832 to change the classification.

Steps to File Form 8832

  1. Use IRS Form 8832
  2. Follow the instructions to complete the two-page form (three pages if "late election relief" is desired.) The instructions are part of the form.
  3. Every partner or member must sign the form. An authorized representative for the business must also sign.
  4. File the completed form with the IRS Service Center for your state. Also, send a copy of Form 8832 with your next business tax return.
  5. The IRS will either accept or deny the filing request. They will notify the business within 60 days with the decision.

Frequently Asked Questions

1. What is the difference between Form 8832 and Form 2553? Form 8832 allows partnerships and LLCs to elect corporate taxation, while Form 2553 is specifically for electing S corporation status.

2. Can an LLC revert to its original tax status after filing Form 8832? Generally, once an LLC files Form 8832, it must keep the election for five years before changing it again unless the IRS grants an exception.

3. Does filing Form 8832 change state tax treatment? Not necessarily. Some states do not recognize federal tax elections and may continue to tax the entity based on its original structure.

4. Is electing corporate taxation always beneficial for an LLC? It depends on the business's financial situation. Corporate taxation may reduce self-employment taxes but could lead to double taxation on profits.

5. How long does it take for the IRS to approve Form 8832? The IRS typically processes Form 8832 within 60 days, but processing times may vary.

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