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Form 8832

Form 8832 allows businesses to choose their tax treatment, impacting their tax liabilities and organizational structure.

  • Definition

  • When to file

  • Election options

What is Form 8832?

Form 8832 is a United States Internal Revenue Service (IRS) tax form that certain business entities use to elect how they are classified for federal tax purposes. This form is known as the Entity Classification Election and allows businesses to choose whether they'll be taxed as a corporation, partnership, or disregarded entity. Companies that meet certain qualifications pass taxes to the sole owner and are disregarded by the IRS. 

The significance of Form 8832 lies in its flexibility. It allows businesses to select the most advantageous tax structure based on their specific circumstances. This strategic choice can significantly impact the amount of tax a company owes each year.

The election made on Form 8832 can have long-term tax implications. For instance, corporations might be subject to double taxation, while partnerships and disregarded entities are only taxed once. Employees do not typically need to worry about Form 8832 as it's an entity-level decision.

For international employees, the impact of Form 8832 can vary. If the entity has elected to be treated as a corporation, it may be subject to U.S. corporate taxes regardless of where the employee resides. Alternatively, if the entity is a partnership or disregarded entity, the U.S. tax liability may flow through to the individual level, potentially affecting international employees.

By understanding and correctly utilizing Form 8832, businesses can potentially save on taxes and ensure compliance with IRS regulations.

How Form 8832 is structured

The form itself is split into two main sections: election information and late election relief. The election information asks about the tax election status of the business entity as well as the number of owners in the business. There may be additional fields required depending on the answers to these questions.

The late election relief section is only required if you are filing your tax classification after the deadline. To be eligible for late relief, you must meet the following requirements:

  • You filed the form too late and the election was originally denied.

  • You haven't filed taxes yet because the deadline hasn't passed or you have already filed your taxes.

  • There is a reasonable cause for not filing on time.

The requested start date is not more than three years and 75 days from the late election relief filing date.

When to file Form 8832

An organization will typically fill out and submit Form 8832 for three main reasons. Businesses are required to select one of those reasons. There is no official due date for filing Form 8832, but the election you choose can only be applied to a full tax year. That means if you file during your company's fiscal year, the election won't be applied till the following year.

Late election relief is available as explained above but you must meet all the requirements to be eligible. Companies using Form 8832 to reclassify as a sole proprietorship or partnership need to be confident of their decision. An enterprise can only change its election once every 60 months.

Form 8832 election options

Form 8832 offers three primary choices for domestic and foreign businesses. Reasons for each include:

Taxed as a corporation

Companies currently classified as LLCs that wish to change to a C-corporation status will use Form 8832 to do so. Being taxed as a C-corporation has the potential to lower corporate tax rates and result in significant savings. There is also no self-employment tax liability since, as the owner, you are technically considered an employee of your company.

Another reason to elect C-corporation tax status is because it allows you to issue different types of stock. When your business is growing and you need to increase access to capital, a C-corporation allows you to sell preferred stock. This helps keep your company's ownership structure in place while providing investors with distinct rights or preferences.

Taxed as a partnership

Another primary reason for using Form 8832 applies to companies that are currently taxed as multi-member LLC C-corporations and wish to change to a partnership. A partnership allows company finances and expenses to pass through to the individual level. This means that profits and losses will be reported on your individual income tax return, saving you from double taxation.

Were the company to remain a multi-member LLC, it would be required to fill out a tax return and the individual owners would also need to file. This is referred to as double taxation. Companies that take advantage of the pass-through tax structure will avoid this issue.

Taxed as a separate entity

The final common reason companies use Form 8832 is to change from a single-member LLC C-corporation to a sole proprietorship. The logic is similar to multi-member LLCs that change to partnership status: companies are trying to avoid double taxation. In this scenario, the company's income and expenses will be reported on your individual tax return.

One of the primary reasons for choosing a sole proprietorship is simplicity. Sole proprietorships have fewer formalities than LLCs or C-corporations. They need not file annual reports with the state or keep minutes from meetings. Remember though, that an LLC can only switch its election status once every 60 months, so be sure of your selection.

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