IRS Form 8832: Choose How Your Business is Taxed
An eligible business entity – such as a partnership or limited liability company – can use Form 8832 to elect a different federal tax classification if it doesn’t want to use its default classification. A change in classification also changes how the business is taxed. In most cases, an entity classification election using Form 8832 must remain in place for at least five years.
Key Takeaways
- Under the IRS "check-the-box" regulations, certain business entities can choose how they’re classified for federal income tax purposes, which significantly impacts how the business is taxed.
- Form 8832 is used by newly-formed businesses to select their initial tax classification, and by existing businesses that want to change their classification.
- Only “eligible entities” can pick a tax classification using Form 8832. Partnerships and limited liability companies are eligible entities, while sole proprietorships and most corporations are not.
- Once a tax classification election is filed and accepted by the IRS, the business generally must wait at least five years before changing its classification again, unless there’s a significant change in ownership.
What is Form 8832?
It’s always nice to have options. And when it comes to your business’s federal tax classification, you might have some flexibility.
That’s because the IRS’s “check-the-box” regulations allow certain business entities to choose how they’re classified for federal income tax purposes. Since a business’s classification determines how it’s taxed, this can be an extremely important and valuable opportunity.
If your business is an eligible entity and you want to take advantage of this opportunity, use Form 8832 to let the IRS know how you would like the business to be classified. You can use the form for a newly-formed business that’s selecting its initial classification, or for an existing business that wants to change how it’s classified.
TurboTax Tip:
A business that wants to be treated as an S corporation doesn’t need to file Form 8832. Instead, it must file Form 2553 to make that election (assuming it satisfies all the S-corp requirements).
Tax classifications and the check-the-box regulations
Before diving deeper into Form 8832 itself, let’s take a closer look at business entity classifications and how you can change them under the check-the-box regulations.
Default classification rules
There are a few tax classification rules that automatically apply when a business entity is formed. The default classification dictates how the business is treated and taxed by the IRS, unless it’s changed using Form 8832.
For example, a business incorporated under a U.S. law is generally classified as a corporation for federal income tax purposes. As a result, the business itself has to file an annual tax return (Form 1120) and pay tax on its income. That income is then taxed a second time when it’s paid to shareholders as dividends.
Other U.S. business entities are classified by default as either a:
- partnership, if it has two or more owners
- disregarded entity, if it has just one owner
Partnerships themselves don’t pay federal income tax. Instead, their income, losses, deductions, and credits are passed directly to the partners, who then report their proportionate share of these items on their personal income tax return. However, partnerships still have to file an information return with the IRS each year (Form 1065).
Disregarded entities don’t pay federal income tax, either. Instead, the IRS treats the business owner and the business as one and the same. As a result, the business’s income and expenses are generally reported directly on the owner's personal tax return using Schedule C, and there’s no separate return filed by the business.
Foreign businesses. Different default classification rules apply to foreign businesses operating in the U.S. They’re classified as either a:
- corporation, if all owners have limited liability
- partnership, if it has two or more owners and at least one owner doesn’t have limited liability
- disregarded entity, if it has just one owner who doesn’t have limited liability
Electing a different tax classification
Under the IRS’s “check-the-box” regulations, certain business entities can reject their default classification and elect (using Form 8832) to be classified as either a:
- corporation
- partnership
- disregarded entity
However, while any eligible business can elect to be classified as a corporation, there are restrictions on who can choose to be classified as a partnership or disregarded entity. Only a business with at least two owners can be classified as a partnership, while only a business with one owner can be classified as a disregarded entity.
Once an election is made, the business generally has to wait at least five years before switching its classification again. However, if more than 50% of the business ownership changes, the IRS might allow another reclassification sooner.
Who can file Form 8832?
Only “eligible entities” with an Employer Identification Number (EIN) can take advantage of the check-the-box regulations and use Form 8832 to pick their tax classification (use Form SS-4 to apply for an EIN if your business doesn’t already have one).
Partnerships and limited liability companies are eligible entities, but sole proprietorships are not.
Corporations generally aren’t eligible entities, either. This includes businesses that are automatically classified as corporations, such as banks, insurance companies, and joint-stock companies.
However, an eligible entity that previously elected to be treated as a corporation – and is currently classified as a corporation – can use Form 8832 to change its classification again (as long as the five-year waiting period has passed).
A foreign business that’s classified as a corporation under the foreign default rules can also file Form 8832 if it otherwise qualifies as an eligible entity.
Tax-exempt organizations, real estate investment trusts (REITs), and S corporations can’t change their classification using Form 8832. That’s because they’re treated as if they made an election under check-the-box regulations to be classified as a corporation.
When to file Form 8832
There’s no set due date for Form 8832. You simply send the form to the IRS when you want to change the classification of your business. Again, that can be when the business is first created, or at some other point down the road.
You can also pick the effective date of the classification election. It will generally be the date you enter on Form 8832, or the date you file the form if no date is included on the form.
However, the effective date for your business’s classification election can’t be more than 12 months after the date Form 8832 is filed. If you write-in a later date, the election will be effective 12 months from the filing date.
You can also pick a retroactive effective date for your business’s classification election. So, for example, if you start a new business, the election can still apply on day one if you file Form 8832 after the company is up and running. But a retroactive effective date can’t be more than 75 days before the date you file Form 8832. If you select an earlier date, the election will default to 75 days before the date it’s filed.
Form 8832 doesn’t have to be filed every year, either. Once it’s accepted by the IRS, a new classification remains in place and continues to apply year after year without any further action (unless you file another Form 8832).
What if you forget to file Form 8832?
If you don’t file Form 8832 on time, you still might be able to elect a new business classification for previous tax years under the IRS’s late election relief rules. Generally speaking, the following requirements have to be met to do this:
- Your business timely filed all federal income tax returns for the previous tax years (except returns that aren’t due yet) as if it was classified as the type of business you want it to be.
- Your business had “reasonable cause” for the failure to file Form 8832, such relying on a qualified tax advisor or attorney who failed to file the form.
- You ask for late election relief within three years and 75 days from the retroactive effective date of the classification election you’re requesting (although you will want to request the relief as soon as possible after realizing that Form 8832 wasn’t filed).
You can request late election relief on Form 8832. An explanation of why your business didn’t file Form 8832 on time must be provided. You (or another authorized person) and each affected person also have to sign the form and declare, under penalty of perjury, that all the elements required for relief have been satisfied.
If the late election relief requirements aren’t met, you can still seek relief by requesting a private letter ruling from the IRS.
How to file Form 8832
You can’t file Form 8832 electronically. It has to be printed out and mailed to the IRS. The IRS mailing address you use depends on where your business is located. Sending the form by certified or registered mail is recommended.
Form 8832 also has to be signed by either:
- all the business’s current owners
- any officer, manager, or member who’s authorized under local law or the business’s organizational documents to make a tax classification election
If you’re making a retroactive election, anyone who was a former owner from the classification election’s effective date to the election filing date also has to sign the form.
It’s usually best to send a copy of Form 8832 with the original signatures (in other words, don’t send a copy of the original form). Don’t use electronic signatures, either.
You also have to attach a copy of Form 8832 to your business’s federal tax or information return for the tax year you made the classification election. If the business itself isn’t required to file a return for that year, the business’s owners need to attach a copy of Form 8832 to their federal tax returns for the tax year that the election is effective.
If you don’t attach a copy of Form 8832 to a tax return, it won’t invalidate an otherwise valid election. However, the IRS could impose penalties on anyone who was required to attach the form.
Should I File Form 8832 and change my business’s tax classification?
If you’re happy with your business’s default classification, then there’s no need to file Form 8832 and select a different one. But if there’s a good reason to pick a different classification, then by all means look into filing Form 8832 and making a change.
Which direction you should take depends on the unique facts and circumstances surrounding your business. Changing your business's tax classification can have a significant impact on your taxes, legal structure, and future growth potential. That’s why it's a good idea to talk to a tax professional or other financial advisor to help you make the right choice before filing Form 8832.
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