Form 8832: How an LLC Can Choose or Change Its Federal Tax Classification
When you form a limited liability company (LLC), the business structure you establish under state law does not by itself determine how the IRS will tax the company. Depending on the circumstances, an LLC may receive a default federal tax classification or elect a different classification.
For eligible LLCs, IRS Form 8832, Entity Classification Election, is generally used to elect to have the business treated as a corporation for federal tax purposes or to change an eligible entity's classification. Understanding when Form 8832 is required, how the election works, and when it becomes effective can help business owners avoid costly filing mistakes.
What Is IRS Form 8832?
Form 8832 is the IRS form used by an eligible business entity to elect its federal tax classification.
An LLC can generally be treated by the IRS as a disregarded entity, partnership, or corporation, depending on the number of owners and elections made. An LLC that wants corporate tax treatment generally uses Form 8832 to make that election.
An eligible LLC that wants S corporation taxation generally does not use Form 8832 as its S corporation election. Instead, an eligible entity generally files Form 2553, Election by a Small Business Corporation, to elect S corporation status.
This distinction is important because C corporation and S corporation taxation are different federal tax elections.
How the IRS Classifies an LLC
The number of owners generally determines an LLC's default federal tax classification.
Single-member LLC
A domestic LLC with one owner is generally treated as a disregarded entity for federal income tax purposes unless it elects to be classified as a corporation.
For an individual owner, the LLC's business activity is generally reported on the owner's federal income tax return. For example, income and expenses from an active trade or business may generally be reported on Schedule C (Form 1040).
Although the LLC may be disregarded for federal income tax purposes, it remains a separate legal entity under applicable state law.
Multi-member LLC
A domestic LLC with two or more members is generally classified as a partnership for federal income tax purposes unless it elects corporate treatment.
The partnership generally files Form 1065, U.S. Return of Partnership Income, and provides each member with a Schedule K-1 reporting the member's share of applicable income, deductions, credits, and other tax items.
The members generally use the information reported on their K-1s when preparing their own tax returns.
Can an LLC Choose S Corporation Taxation?
Yes, an eligible LLC can elect to be treated as an S corporation for federal tax purposes.
However, the process is different from electing C corporation treatment. An eligible LLC generally makes the S corporation election by filing Form 2553 with the IRS.
Once the election is effective, the business generally files Form 1120-S, U.S. Income Tax Return for an S Corporation, and provides shareholders with Schedule K-1 information.
S corporation taxation also introduces additional rules involving shareholder-employees, reasonable compensation, payroll taxes, distributions, basis, and other requirements. Business owners should therefore evaluate the election based on their particular circumstances rather than assuming that S corporation treatment will automatically reduce taxes.
When Is Form 8832 Used?
Form 8832 is generally relevant when an eligible entity wants to elect or change its federal tax classification.
For example, an LLC may elect to be treated as an association taxable as a corporation. An entity that is already classified as a corporation may, under the applicable rules, also use Form 8832 to make certain classification changes.
The form requires the taxpayer to identify the applicable election and provide information about the entity, its owners, and the requested effective date.
Electing Corporate Tax Treatment
An LLC that wants to be taxed as a C corporation generally makes that election using Form 8832.
After the election takes effect, the business generally files Form 1120, U.S. Corporation Income Tax Return, rather than reporting the business under its previous default classification.
Whether corporate taxation is appropriate depends on numerous factors, including how the owners intend to use business profits, compensation arrangements, distributions, investment plans, and applicable federal and state taxes.
When Does Form 8832 Take Effect?
The effective date is one of the most important parts of a Form 8832 election.
Generally, an eligible entity can choose an effective date that is no more than 75 days before the date the election is filed and no more than 12 months after the filing date.
These rules mean that business owners should not assume they can simply file Form 8832 whenever convenient and make the election effective for any desired date.
If the election is filed late, the business may be able to request late-election relief if it satisfies the applicable IRS requirements.
What Is Late-Election Relief?
Part II of Form 8832 addresses certain requests for relief from a late entity-classification election.
The IRS provides specific requirements for late-election relief. Depending on the circumstances, the entity generally must establish that it acted reasonably and consistently treated the entity according to the requested classification, among other requirements.
Because late-election relief has technical requirements, businesses should carefully review the current IRS instructions before relying on this option.
The 60-Month Limitation
Changing an entity's federal tax classification is not necessarily something a business can do repeatedly.
Under the IRS entity-classification regulations, an eligible entity generally cannot change its classification by election again during the 60 months following the effective date of a prior election, subject to exceptions.
This restriction makes it particularly important to consider the long-term consequences before submitting Form 8832.
Choosing the Right Tax Classification
The tax classification of an LLC can affect federal income-tax reporting, payroll taxes, owner compensation, distributions, compliance requirements, and the way business income appears on the owners' tax returns.
For that reason, choosing a classification should not be based solely on the possibility of a lower tax bill. The business's ownership, expected income, compensation, state requirements, future growth, and plans for distributing or reinvesting profits may all matter.
Final Thoughts
Form 8832 can be an important tool for an eligible LLC that wants to change its federal tax classification. However, it is essential to distinguish between the LLC's state-law legal structure and its federal tax classification.
An LLC may receive a default classification or, when eligible, elect corporate treatment. An S corporation election is a separate matter and generally requires Form 2553.
Because entity elections can have long-lasting tax and compliance consequences, business owners should review the current IRS instructions and consider consulting a qualified tax professional before filing Form 8832.
This article is intended for general educational purposes and does not constitute individualized tax or legal advice.
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