How to Make an Entity Classification Election, Form 8832

The Form 8832: Understanding IRS Entity Classifications 2023

The Form 8832 

While there are thousands of different types of IRS tax forms, Internal Revenue Service Form 8832 (which is used to make to make an Entity Classification Election) is one of the most important. How an entity is classified for US tax purposes impacts how that same entity will be taxed by the IRS. For example, will it be a flow-through such as a Sole Proprietorship, S-Corp, or Partnership — or will it have two levels of taxation such as a C corporation. Under United States tax law, taxpayers can make certain elections to be treated differently for tax purposes than they would ordinarily be treated based on the type of entity classification. These elections are different based on whether or not the entity is US based or foreign-based, because the default rules for domestic entities are different than it is for foreign entities. Let’s look at IRS Form 8832 Entity Classification elections by going through the IRS instructions:

Purpose of the Form

• • • An eligible entity uses Form 8832 to elect how it will be classified for federal tax purposes, as a corporation, a partnership, or an entity disregarded as separate from its owner.

    • An eligible entity is classified for federal tax purposes under the default rules described below unless it files Form 8832 or Form 2553, Election by a Small Business Corporation.

What does this Mean?

It means that if an entity is considered eligible, then it can use Form 8832 to determine how it will be classified for federal tax purposes. Unless an entity makes an election it will go by the default rules on how it will be treated for tax purposes.

Election to be an S Corp

An entity must file Form 2553 if making an election under section 1362(a) to be an S corporation.

What does this Mean?

One of the most common types of elections is for an entity to be treated as an S corporation instead of a C corporation so that the income flows through and there is only one level of tax. This confirms Form 2553 must be filed n order to make the election:

Eligible Entity

• • • An eligible entity is a business entity that is not included in items 1, or 3 through 9, under the definition of corporation provided under Definitions. Eligible entities include limited liability companies (LLCs) and partnerships.

    • Generally, corporations are not eligible entities.

    • However, the following types of corporations are treated as eligible entities:

    • An eligible entity that previously elected to be an association taxable as a corporation by filing Form 8832. An entity that elects to be classified as a corporation by filing Form 8832 can make another election to change its classification (see the 60-month limitation rule discussed below in the instructions for lines 2a and 2b).

    • A foreign eligible entity that became an association taxable as a corporation under the foreign default rule described below.

Default Rules

• • • Existing entity default rule.

      • Certain domestic and foreign entities that were in existence before January 1, 1997, and have an established federal tax classification generally do not need to make an election to continue that classification.

      • If an existing entity decides to change its classification, it may do so subject to the 60-month limitation rule. See the instructions for lines 2a and 2b. See Regulations sections 301.7701-3(b)(3) and 301.7701-3(h)(2) for more details.

Domestic Default Rule

• • • Unless an election is made on Form 8832, a domestic eligible entity is:

      • A partnership if it has two or more members.

      • Disregarded as an entity separate from its owner if it has a single owner. A change in the number of members of an eligible entity classified as an association (defined below) does not affect the entity’s classification. However, an eligible entity classified as a partnership will become a disregarded entity when the entity’s membership is reduced to one member and a disregarded entity will be classified as a partnership when the entity has more than one member.

What does this Mean?

There are various default rules that come into play for domestic eligible entities. The general rule is that when there are two or more members, it is considered to be a partnership. If there is only one owner, then it is considered to be a disregarded entity.

Foreign Default Rule

Unless an election is made on Form 8832, a foreign eligible entity is:

• • • A partnership if it has two or more members and at least one member does not have limited liability.

    • An association taxable as a corporation if all members have limited liability.

    • ‘Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.

What does this Mean?

The default rules for foreign entities are different. In a situation in which there are two or more members and at least one member does not have limited liability, it is considered a partnership. For example, if there are three members and one member has a full liability that is not limited, it is considered a partnership for tax purposes. If all of the members have a limited liability, then it is taxed as a corporation. This would make sense as it is similar to a US corporation in concept in that with a corporation there are the members have limited liability and is typically subject only to their investment in the company and not personal liability outside of their investment or ownership of the corporation. If it is a single owner that does not have limited liability, it will be disregarded. This is similar in concept to an LLC that has a single member in the United States in which the SMLLC is disregarded for tax purposes.

Who Must File

File this form for an eligible entity that is one of the following:

A domestic entity electing to be classified as an association is taxable as a corporation. 

• • • A domestic entity electing to change its current classification (even if it is currently classified under the default rule).

    • A foreign entity that has more than one owner, all owners having limited liability, electing to be classified as a partnership.

    • A foreign entity that has at least one owner that does not have limited liability, electing to be classified as an association taxable as a corporation.

    • A foreign entity with a single owner having limited liability, electing to be an entity disregarded as an entity separate from its owner.

    • A foreign entity electing to change its current classification (even if it is currently classified under the default rule). Do not file this form for an eligible entity that is:

    • Tax-exempt under section 501(a);

    • A real estate investment trust (REIT), as defined in section 856; or

    • Electing to be classified as an S corporation. An eligible entity that timely files Form 2553 to elect classification as an S corporation and meets all other requirements to qualify as an S corporation is deemed to have made an election under Regulations section 301.7701-3(c)(v) to be classified as an association taxable as a corporation. All three of these entities are deemed to have made an election to be classified as an association.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.