Form 8832

IRS Form 8832 is a tax classification document issued by the Internal Revenue Service (IRS) that allows certain eligible business entities to elect how they will be classified for federal tax purposes. Specifically, it enables an entity to choose whether to be taxed as a corporation, partnership, or disregarded entity. The form is most commonly associated with limited liability companies (LLCs) that want to change their default tax classification.

Purpose of Form 8832

When a business entity is formed, it is automatically assigned a default tax classification by the IRS based on its legal structure and number of owners. However, this default classification may not always be the most tax-efficient option for the entity. Form 8832 gives qualifying entities the flexibility to elect a different classification that better suits their financial or operational goals.

For example, a single-member LLC is typically treated as a disregarded entity for tax purposes, meaning it is taxed like a sole proprietorship. If that LLC wants to be taxed as a corporation instead, it must file IRS Form 8832 to make that election.

Who Can File Form 8832

Form 8832 can be filed by a wide range of domestic and foreign eligible entities. These include:

• Domestic LLCs
• Foreign entities that are eligible to choose their classification under U.S. tax law
• Domestic partnerships
• Business entities not automatically classified as corporations under IRS regulations

However, certain entities are automatically classified as corporations and are therefore ineligible to file Form 8832 to elect a different status. These include most incorporated businesses and certain entities listed under IRS regulations as per se corporations.

Form 8832 LLC Use Cases

The most common scenario in which Form 8832 is used involves an LLC. By default, an LLC with one member is taxed as a sole proprietorship, and an LLC with more than one member is taxed as a partnership. While these default classifications offer simplicity, they do not always align with the strategic or financial goals of the business.

A Form 8832 LLC election allows:

• A single-member LLC to be taxed as a corporation
• A multi-member LLC to be taxed as a corporation
• An LLC taxed as a corporation to revert to being taxed as a disregarded entity or partnership (with limitations on frequency)

It is important to note that electing to be taxed as an S corporation requires filing Form 2553 instead, though in some cases, Form 8832 must be filed first to be treated as a C corporation before submitting Form 2553.

How to Complete IRS Form 8832

Form 8832 is a two-page document requiring key details about the business and its desired tax classification. The main sections include:

• Basic Entity Information: This includes the name, address, EIN (Employer Identification Number), and the jurisdiction where the entity was formed.
• Election Information:  The filer must indicate the current classification and the new classification being requested. They must also specify the effective date of the new classification, which can be up to 75 days prior to the filing date or up to 12 months in the future.
• Signature of Authorized Person: The form must be signed by an individual authorized to act on behalf of the entity, such as a managing member, officer, or other designated individual.
• Late Election Relief (if applicable): If the entity is filing Form 8832 after the deadline for making the election, it may request late election relief under certain IRS rules by including a reasonable cause explanation.

Filing and Deadlines

IRS Form 8832 must be filed within specific timeframes to ensure timely changes in tax classification. Generally:

• The election can be retroactive up to 75 days before the filing date
• It can also be prospective, with the new classification taking effect up to 12 months after the filing date

The form must be mailed to the appropriate IRS service center, as indicated in the instructions provided by the IRS. There is currently no option for electronic filing.

Frequency and Limitations

An entity that has filed IRS Form 8832 to elect a classification generally cannot change its classification again for 60 months (5 years). Exceptions to this rule include:

• The business entity has undergone a significant change in ownership
• The IRS grants relief based on reasonable cause

This limitation helps ensure that businesses are not frequently shifting classifications for the sole purpose of minimizing taxes.

Tax Implications of Filing Form 8832

The decision to file IRS Form 8832 can have major tax implications. Electing corporate status, for example, subjects the entity to corporate tax rules, which include flat corporate income tax rates, potential double taxation (in the case of C corporations), and requirements for payroll taxes on owner compensation.

In contrast, remaining classified as a partnership or disregarded entity allows income to pass through directly to owners, avoiding double taxation but potentially increasing the owner’s self-employment tax liability.

Entities should consult with a tax advisor or accountant before submitting IRS Form 8832 to evaluate the short- and long-term tax consequences of changing classification.

Common Reasons to File Form 8832

Businesses typically choose to file Form 8832 for one or more of the following reasons:

• To reduce overall tax liability by taking advantage of corporate tax rates
• To make the business more attractive to investors by electing a corporate structure
• To comply with specific tax planning strategies
• To align the tax classification with legal or operational goals
• To become eligible to file Form 2553 and elect S corporation status

Form 8832 vs. Form 2553

While both forms deal with tax classification, Form 8832 and Form 2553 serve different purposes:

• Form 8832 allows entities to elect to be treated as a corporation, partnership, or disregarded entity
• Form 2553 is used specifically to elect S corporation status, which has additional requirements and restrictions

In some situations, an entity must file Form 8832 first to elect corporate status and then follow up with Form 2553 to become an S corporation. Timing is critical, as both forms have strict deadlines for retroactive and prospective elections.

Recordkeeping and IRS Correspondence

Once Form 8832 is processed, the IRS sends a written notice of acceptance or denial of the classification election. Businesses are advised to retain this confirmation in their permanent tax records.

Entities should also document the reasons for filing Form 8832, especially when requesting late election relief. Supporting documentation may include internal memos, financial analyses, and communications with legal or tax professionals.

Summary

IRS Form 8832 is a critical tool for eligible business entities seeking to control how they are taxed under federal law. It provides flexibility to align tax classification with financial goals and operational realities. For an LLC, filing Form 8832 opens up strategic tax planning opportunities, allowing the entity to be treated as a corporation when beneficial.

Because of the potential complexity and long-term impact of changing tax classification, it is strongly recommended that businesses consult with a tax professional before filing Form 8832.