When filing US taxes, different business entities follow different rules. Fortunately, some domestic and foreign businesses can use Form 8832 to choose how the IRS classifies them for tax purposes. Depending on the details of your business, this can bring you several benefits.
So what is Form 8832, and how does it work? Here’s what you need to know.
What Is Form 8832?
Form 8832, Entity Classification Election, is a tax form that allows certain businesses to select whether they want to be taxed as a:
- C Corporation
- Disregarded Entity
If you don’t use Form 8832 to make an election, the IRS will tax you based on your default entity classification, and you could end up paying more than you need to. By making the right election, however, you may be able to save thousands of dollars every year.
This can also help protect your personal finances.
For example, a single-member LLC is taxed as a disregarded entity by default, and a multi-member LLC is taxed as a partnership. In both cases, the LLC members will be responsible for the business’s taxes on their individual tax returns. To avoid this, many LLC members prefer to be taxed as a C Corporation, which stops the business’s profits and losses from “passing through” to their personal finances.
Of course, if you’re happy with the default entity tax status of your business, there’s no need to worry about Form 8832.
(Note: Form 8832 is not used for electing to be taxed as an S Corporation. To do that, you’ll need to file IRS Form 2553 instead.)
Who Must File Form 8832?
This form is not mandatory for anyone. It just gives eligible businesses the option to change their entity classification if they want to.
So who is eligible to file Form 8832? The general list is:
- Domestic partnerships
- Domestic LLCs
- Foreign partnerships
- Foreign LLCs
- Foreign corporations (in certain jurisdictions)
- US-owned foreign corporations (in certain jurisdictions)
Typically, domestic corporations cannot file Form 8832, nor can foreign corporations listed in IRS Regulations 301.7701-2(b)(8).
For more details, refer to the Form 8832 instructions provided by the IRS.
When Is Form 8832 Due?
Often, tax deadlines for businesses are strict. But because Form 8832 isn’t mandatory, it doesn’t have a deadline, per se. You can file it at any point in the lifetime of an eligible business. Whether you’re operating a brand new company or one that’s been around for decades, you can still elect to change its entity classification.
There are some basic rules worth knowing about, however. When filing Form 8832, you can include a date that the change will take effect. This date has to fit within a certain timeframe, namely:
- Up to 75 days before you file the form
- Up to one year after you file the form
An accountant can help you choose the ideal effective date to put on your entity classification election form. There’s often some strategy involved, and making the right call could help you optimize your taxes.
Once the IRS accepts your entity election, your new classification will remain in place indefinitely. There’s no need to file Form 8832 a second time unless you want to change your entity classification again.
However, in most cases, you can only change your classification once every five years, so you may have to wait. But there are a few exceptions, so consult your accountant to see if you can make a new election before the five years are up.
Is Form 8832 Complicated?
No, this isn’t an especially complicated form. To complete it, all you need to know is your:
- Business name
- Business address
- Business phone number
- Employer Identification Number (EIN)
As for how long it takes to file, the IRS estimates these time investments:
- Recordkeeping: 2 hours and 46 minutes
- Learning about the law or the form: 3 hours and 48 minutes
- Preparing and sending the form to the IRS: 36 minutes
And if you want to be taxed as a corporation, you’ll also need to file articles of incorporation with your secretary of state before filing Form 8832, which adds a further complication.
The good news is that by hiring an experienced accountant, you can pass the paperwork (and the headaches) on to someone else. This lets you focus on tasks more central to your business and personal life.
How Do I Fill Out Form 8832?
If you’ve decided that you want to change the entity classification for your business, there are a few quick steps to take.
First, review the IRS instructions for Form 8832 and gather the information you’ll need to complete it. Then, download the form from the IRS website.
At the top of the form, fill out your basic business information, such as its name, address, and EIN.
This will bring you to Part 1: Election Information. Complete it to choose how you want your business to be taxed.
Part 2: Late Election Relief is only necessary if you want to set an effective date earlier than 75 days before your filing date. You can use this section to request that the IRS make an exception to their standard timeframe. If you don’t need an exception, then you can skip Part 2 entirely.
Finally, sign the document with the appropriate signature (or signatures), and send it to the IRS. If you live in the US, you’ll mail it to either Kansas City, Missouri, or Ogden, Utah, depending on what state you’re in. See here for more details.
But if you’re living as an expat in a foreign country—or US possession such as Puerto Rico—you’ll want to mail the form to:
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0023
Once you’ve sent the form in, all you have to do is wait for a reply. The IRS should send you a letter either accepting or denying your request to change your status within 60 days. If you haven’t heard back after 60 days, you can call the IRS at 1-800-829-0115 or send a letter to the service center to check on the status of your form.
And that’s it! You’re all set. If your entity classification is accepted, just make sure to attach a copy of the form to your US federal income tax return for the first year it’s effective, and you’re good to go.
How About a Little Help?
If you own a foreign business that pays US taxes, Form 8832 may be the key to optimizing your tax return. And hopefully, after reading this article, you have the knowledge you need to get started.
But if you still have any questions, we’d be happy to help. At Greenback Expat Services, we give expats around the world the expert support they need to meet their US tax obligations without the usual hassle.
Contact us, and we’ll give you all the answers you need.