Form 8832, titled "Entity Classification Election", is a form used by businesses to elect how they want to be classified for federal tax purposes. It allows a business entity to choose whether it wants to be classified as a disregarded entity, a partnership, or a corporation under U.S. tax law. This election is important for businesses that are structured as entities like limited liability companies (LLCs) or foreign entities that wish to change or confirm their tax classification.
Key Purposes of Form 8832
- Electing an Entity Classification:
- Businesses that are organized as LLCs (Limited Liability Companies) or other types of entities have the flexibility to choose how they are classified for tax purposes. Without filing Form 8832, an LLC, for example, might be classified as a disregarded entity (if it has one owner) or a partnership (if it has more than one owner) by default. By filing Form 8832, the business can elect to be taxed as a corporation (either a C-corporation or an S-corporation, depending on other factors).
- Tax Treatment Election:
- The form allows an entity to elect to be taxed as a corporation (C-corp or S-corp) instead of as a pass-through entity (such as a partnership or LLC).
- The election to be taxed as a C-corp means the entity will be subject to corporate tax rates, and if it distributes dividends, the dividends will be taxed again at the individual level.
- If the business elects to be treated as an S-corp, it will benefit from pass-through taxation, where the business itself is not taxed on its income, but rather, the income is passed through to the individual shareholders.
- Foreign Entity Elections:
- Form 8832 is also used by foreign entities that wish to be taxed as a U.S. entity for tax purposes. This is especially relevant for businesses that are structured as LLCs or other foreign business entities that want to be treated as corporations or partnerships under U.S. tax law.
- U.S. tax law has specific rules for classifying foreign entities, and filing Form 8832 allows foreign businesses to choose whether they are treated as corporations or partnerships for U.S. tax purposes, which can impact their tax liabilities and obligations.
- Changing Tax Classification:
- If a business entity wants to change its tax classification, it can file Form 8832 to elect a new classification. For example, if a partnership wants to be taxed as a corporation, it can file this form. However, there are specific timing requirements for changing an election, and businesses can only change their classification once every five years (unless they meet certain conditions).
Who Needs to File Form 8832?
Businesses that are eligible to elect a different classification for tax purposes may need to file Form 8832. This includes:
- LLCs: LLCs (which are not automatically classified as corporations) can file Form 8832 to choose whether they want to be treated as a partnership, a corporation, or a disregarded entity.
- Foreign Entities: Foreign businesses that wish to be treated as U.S. entities for tax purposes can use Form 8832 to elect their classification (as a corporation or a partnership).
- Existing Businesses: Any business that wants to change its tax classification from one type to another (for example, from a partnership to a corporation) can file Form 8832 to make that change.
- Newly Formed Entities: When a business is newly formed, it may file Form 8832 to elect its tax classification at the time of formation, although this is not always required.
