Eligible entities use Form 8832 to elect their classification for federal tax purposes. In effect, a business can form as one entity type but pay taxes as a different entity type. Below, we’ll dive into the Form 8832 definition, look at examples, explain some benefits, and review the requirements for filing.
The IRS’s Form 8832, Entity Classification Election, is what certain businesses use to tell the IRS how to classify them for federal tax purposes. When a business files Form 8832, it’s making a tax election and choosing whether it wants to be taxed as a C corporation, a partnership, or a sole proprietorship. Entities eligible to file Form 8832 include U.S.-based partnerships, limited liability companies (LLCs), and qualifying foreign entities.
Businesses that don’t file Form 8832 are stuck with the default classification for their entity type.
Examples are helpful in understanding the definition of Form 8832. Let’s look at a U.S. limited liability company (LLC).
By default, the IRS classifies single-member LLCs as sole proprietorships and multi-member LLCs as partnerships. Both entity types are subject to pass-through taxation — meaning that all business income and losses pass through to the owners. The entity itself doesn’t pay federal income taxes. Rather, the business owner reports the profits and losses on their personal tax return and pays income tax based on their individual tax rate.
For some businesses, this tax treatment isn’t advantageous (we’ll talk more about this below), so they change how the LLC is taxed. By completing and filing Form 8832, the LLC can make an election to classify itself as a C corporation. The IRS will then tax the LLC as a C corporation where income is taxed twice — once at the corporate level (when the company makes a profit) and again at the shareholder level (when the company issues dividends). This is known as double taxation.
Sticking with LLCs, there are benefits to electing C corporation tax treatment. As we discussed above, LLC owners can elect to keep the default pass-through tax status of an LLC. If they do this, they’d report all business income on their personal tax return. However, in some cases, including this extra income on their personal tax return pushes the business owner into a higher tax bracket. Ultimately, this can mean that they pay more in taxes than if the income was subject to double taxation. So, using Form 8823, they can make an election to reclassify the LLC as a C corporation. This keeps the company’s income separate from the owner’s income.
Deciding which taxation method is best for you is an individual decision that must take your whole financial picture into account. So you may want to consult a tax professional before deciding how you wish to be taxed.
To complete Form 8832, you need basic information about the business, including the following:
You can file Form 8832 at any point while the business exists, and you get to choose the effective date. The only limitation is that the newly elected tax status can only go into effect up to 75 days before making the election — and no later than 12 months after making the election.
Form 8832 is the form that eligible entities use to reclassify their business for tax purposes. Reclassifying your tax status impacts how your business pays taxes and how much it owes. Ensure you understand the tax classification for LLC or your desired business structure.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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