Who's Eligible? IRS Tax Form 8832: Entity Classification Election

Tax Form 8832 Election Instructions

Certain types of business entities (mostly non-corporations) can elect how they will be classified for tax purposes by changing their current default classification using form 8832.

What type of business entities are eligible to file form 8832?

Partnership and limited liability companies are the entities eligible. Along with some, foreign corporations and U.S. owned foreign corporations depending on the jurisdictions. However, certain domestic corporations and foreign corporations listed below are not eligible to file.

Certain eligible business entities that are deemed to have elected to be classified as associations (specifically businesses that are tax exempt, real estate investment trusts, or electing to become an S Corp) also cannot file the form 8832.

The following are not eligible corporations:

  • A business entity describes as incorporated, a joint-stock company, or as a corporation and organized under a federal, state, or Indian tribe statute.
  • An insurance company.
  • A state-chartered business entity conducting banking activities, if any of its deposits are insured under the Federal Deposit Insurance Act.
  • A state or foreign government owned business entity.
  • A business entity that is taxable as a corporation.
  • A foreign business entity classified as a corporation.
  • An entity created or organized under the laws of more than one jurisdiction and if the entity is treated as a corporation with respect to any one of the jurisdictions.

The following types of corporations are eligible entities:

  1. An eligible entity that previously elected to be an association taxable as a corporation by filing Form 8832.
  2. A foreign eligible entity that became an association taxable as a corporation
    See: https://aaronhall.com/tax-form-8832-default-rules-and-definitions/

Effect of Election

Partnership elects to be an association

All partnership assets and liabilities go to the association in exchange for stock in the association which is distributed to the partners (partnership is liquidated).

Association elects to be a partnership

All association assets and liabilities distributed to shareholders, who then contribute these to the partnership (association is liquidated).

Association elects to be disregarded as an entity separate from its owner

Association distributes all assets and liability to single owner (association liquidated).

Disregarded entity separate from owner elects to be an association

Owner contributes all assets and liabilities of entity association in exchange for stock in the association.

When to File 8832

The change in classification must take effect within 75 days before filing or within a year after filing.

Where to File Tax Form 8832

Submit the form to the IRS Center corresponding to your state (If the business’ principle office is located in MN, use the IRS Center located at Ogden, UT 84201). Also, attach copy of the form when you file the business’ or owner’s federal tax return for the tax year in which the business elected a classification. Penalties may arise if the form is not attached.

Acceptance or Non-acceptance of election

The business entity will be notified of acceptance or denial by mail from the IRS Office, typically 60 days after the form is filed.

What information is required to complete form 8832

  • Name of business entity to be classified
  • Employer Identification Number (EIN)
  • Address of business entity

Clarification on IRS form 8832 vs. IRS form 2553

  • Form 8832- for a business entity (mostly non-corporations) to become taxed in a different class (including an S corp.)
  • Form 2553- for a corporation to become an S corp.

All business entities are taxed based on their default classification. Therefore, neither form 8832, nor form 2553, are required unless the business entity wishes to change their current default classification for tax purposes. Form 8832 allows certain business entities (mostly non- corporation classified businesses) to choose what type of classification it would like to be taxed as. While form 2553 allows corporations to become an S corporation, and thereby be taxed as an S corporation. Which form is used depends on the type of business entity that wants to elect a new tax classification.

For more information, see https://aaronhall.com/can-an-llc-be-taxed-as-s-corp-minnesota-tax-attorney/

IRS Form 2553- Election by a Small Business Corporation

Certain corporations can elect to become and therefore be taxed as an S corporation.

“An entity eligible to elect to be treated as a corporation that meets certain tests discussed below will be treated as a corporation as of the effective date of the S corporation election and does not need to file Form 8832. . . The income of an S corporation generally is taxed to the shareholders of the corporation rather than to the corporation itself. However, an S corporation may still owe tax on certain income.”

Which eligible business entities can file this form?

A corporation or other entity eligible to elect to be treated as a corporation may elect to be an S corporation only if it meets all the following tests:

  1. It is (a) a domestic corporation, or (b) a domestic entity eligible to elect to be treated as a corporation.
  2. It has no more than 100 shareholders. You can treat a husband and wife (and their estates) as one shareholder for this test. You can also treat all members of a family and their estates as one shareholder for this test.
  3. Its only shareholders are individuals, estates, exempt organizations, or certain trusts.
  4. It has no nonresident alien shareholders.
  5. It has only one class of stock. Generally, a corporation is treated as having only one class of stock if all outstanding shares of the corporation’s stock confer identical rights to distribution and liquidation proceeds.
  6. It is not one of the following ineligible corporations.
    1. A bank or thrift institution that uses the reserve method of accounting for bad debts.
    2. An insurance company
    3. A corporation that has elected to be treated as a possessions corporation
    4. A domestic international sales corporation (DISC) or former DISC.
  1. It has or will adopt or change to one of the following tax years.
    1. A tax year ending December 31.
    2. A natural business year.
    3. An ownership tax year.
    4. A tax year elected under section 444.
    5. A 52-53-week tax year ending with reference to a year listed above.
    6. Any other tax year (including a 52-53-week tax year) for which the corporation establishes a business purpose.
  2. Each shareholder consents

A parent S corporation can elect to treat an eligible wholly-owned subsidiary as a qualified subchapter S subsidiary. If the election is made, the subsidiary’s assets, liabilities, and items of income, deduction, and credit generally are treated as those of the parent.