An eligible entity makes a Form 8832 election to determine how the entity will be categorized for the federal tax law.
The classification can be:
A limited liability company (LLC), or
A disregarded entity is not treated as the owner of the business.
You must file IRS Form 8832 if you believe reclassifying your firm as a different entity will result in tax benefits.
What is the Purpose of Completing Form 8832?
There are situations where a corporation can reduce its annual tax bill by thousands of dollars simply by changing its tax status.
Unless you specify otherwise, an LLC will be given a "default" tax status when created. LLCs with only one member are typically taxed in the same manner as sole proprietorships, whereas partnerships are the default treatment for LLCs with several members.
However, to get the most out of your tax deductions, your limited liability company (LLC) should be classified as favorably as possible. After careful consideration, it is in your LLC's best interest to switch its tax status. The IRS Form 8832 is the form you'll need to fill out to do this.
You can change your business's tax status from the default by filing IRS Form 8832. Depending on your needs, you can choose to have your limited liability corporation (LLC) taxed as a sole ownership, joint, C corporation, or S corporation.
When is the Deadline for Submitting Form 8832?
Form 8832 can be submitted at any time to the IRS. You can submit it at the moment your company is established or at a later date. The date your election takes effect is also up to you, though only within specified windows of opportunity.
You can only set your effective date up to 75 days before you file Form 8832, and you can only set it up to 12 months after.
If no date is specified, the effective date will be when the form was submitted. You should also be aware that if you're reclassifying unless an exception occurs, you can only modify your election once every five years (60 months).
When Should You File Form 8832?
When filing IRS Form 8832, you have three choices for your foreign entity. You have the option of:
Taxed as a company.
Recognized as an international business alliance.
If your LLC has only one owner, it will be treated as a sole proprietorship and ignored for legal purposes. A pass-through entity is similar to a sole proprietorship in that it receives money in this manner, but it is treated as a separate legal entity for liability reasons.
Form 8832 is not used if an LLC elects to be taxed as an S Corporation. Rather, you'll need to fill out Form 2553.
Eligibility and Entity Type
By filing Form 8832, Entity Classification Election, qualified firms can elect to be treated as sole proprietorships, partnerships, corporations, or disregarded entities for tax purposes. LLCs have the option of being taxed as C Corporations or being classified as single proprietorships or partnerships. Changing your status may help you save money on taxes. Let's talk about who to fill out Form 8832.
1. Filing as a C-Corporation with Form 8832
Form 8832 allows both single-member and multi-member LLCs to choose to file taxes as C corporations. Owners would be subject to double taxation because C-corps are not pass-through businesses.
C-corporations are taxed at a flat rate of 21%, which is significantly lower than the rates that pass-through entities must pay. Despite double taxation, this categorization can be advantageous for small, expanding firms due to the lower tax rate and the ability to deduct more expenses.
2. S-Corporation Filing using Form 8832
Both single-member and multi-member LLCs can use Form 8832 to make the tax election be treated as S-corporations. Those who own corporations that are profitable enough to pay themselves a "fair salary" and distribute at least $10,000 per year in profits to each shareholder might want to consider converting to S-corp status.
The proprietors of an S-corporation are treated as regular employees and given "reasonable compensation" and distributions instead of paying corporate taxes.
3. Filing as a Partnership or Sole Proprietorship Using Form 8832
Whether you have one member or many, you can utilize Form 8832 to dissolve your limited liability company and return to your former status as either a sole proprietorship or a partnership. Unlike sole proprietorships and partnerships, S-corporations and C-corporations involve many paperwork and administrative burdens for owners.
Form 8832: How to Submit It?
Form 8832 is relatively straightforward to complete. Your company's name, address, and EIN are the initially required information (EIN). The next step is to specify whether this is a new business classification or a reclassification of an existing firm. Choose the appropriate tax category and get the signatures of all business owners.
Part I consists of six questions to which you must respond. These questions establish if an entity may file Form 8832 and gather its current and desired classification. You will be told promptly if the answers to these questions show that the company does not qualify to make the election.
The IRS makes clear on Form 8832 that EINs remain the same even if the entity type alters. For those who don't already have one, submitting Form 8832 requires filing an SS-4, Application for EIN.
Since it is only necessary for individuals who have missed the filing deadline to complete Part II, it is also relatively straightforward. Owners, officers, managers, or members of the electing entity must sign off on the form, and you'll have a few lines to explain why the classification election was late.
The Internal Revenue Service can only receive Form 8832 via regular mail; it cannot be submitted electronically.