Form 8832, officially known as the “Entity Classification Election,” is an IRS tax form that eligible businesses use to choose or change their federal tax classification. It is a crucial tool for businesses that wish to be taxed differently than their default classification as assigned by the IRS.
What is the Purpose of Form 8832?
The primary purpose of Form 8832 is to provide flexibility in how a business is taxed. Many business structures, particularly Limited Liability Companies (LLCs) and partnerships, are assigned a default tax classification by the IRS. For example:
- A single-member LLC is typically taxed by default as a disregarded entity (meaning its income and expenses are reported on the owner’s personal tax return, like a sole proprietorship).
- A multi-member LLC is typically taxed by default as a partnership.
Form 8832 allows these businesses to override that default classification and choose to be taxed as:
- A corporation: This is a common choice for LLCs that want to offer stock options or seek to attract outside investment.
- A partnership: This is an option for certain entities that may have been automatically classified as something else.
- A disregarded entity: This is an option for certain single-owner foreign entities.
When to File Form 8832
Businesses are not required to file Form 8832 if they are content with their default tax classification. However, they must file it in the following situations:
- Initial Classification: A newly formed business that wants a tax classification different from the IRS default must file this form. To make the election effective from the start date of the business, the form should be filed within 75 days of its formation.
- Changing an Existing Classification: An established business that wishes to change its current tax classification must also file Form 8832.
- Post-60-Month Period: Once a business has elected a tax classification using Form 8832, it generally cannot change that classification again for 60 months (5 years), unless an exception applies (e.g., a significant change in ownership).
Filing Form 8832 is a significant decision with major tax implications. Businesses often consult with a tax professional to understand the benefits and complexities of electing a specific tax classification.