Form 8832: Everything You Need to Know
Partnerships and Limited Liability Companies (LLCs) can file Form 8832 with the IRS if they want to be taxed as different kinds of companies, like a corporation.6 min read
2. Why Is Form 8832 Important?
3. Entities Eligible to Use Form 8832
4. Effects of Election
5. Form 8832 vs. Form 2553
6. Choosing the Right Tax Status for Your LLC
7. Electing S Corporation Status with Form 8832
8. Reasons to Consider Not Using Form 8832
9. Reasons to Consider Using Form 8832
12. Common Mistakes
13. Frequently Asked Questions
14. Steps to File Form 8832
Updated July 8, 2020:
Form 8832 can be filed with the IRS for Partnerships and Limited Liability Companies (LLCs) if they want to be taxed as different kinds of companies, like a corporation.
Form 8832: What Is It?
Partnerships and Limited Liability Companies can file IRS Form 8832. Businesses file this form if they want to be taxed as different kinds of companies, like a corporation.
Why Is Form 8832 Important?
No business wants to pay too much in taxes. Business entities are given a default tax classification (i.e. a multi-member LLC is taxed as a partnership unless it changes its tax status). Sometimes businesses can pay thousands of dollars less in taxes, just by changing how the business is taxed!
Entities Eligible to Use Form 8832
The IRS restricts which entities are eligible to file Form 8832. Limited liability companies and partnerships are two of the most common eligible entities. Certain foreign corporations can also file this IRS form, as can foreign corporations owned in the United States in certain jurisdictions.
Effects of Election
Electing a new tax status can have a big impact on your organization and the changes that your company undergoes will depend on its status prior to the new election. Learning about these different effects should help you decide if electing a new tax status is the right option for your company.
If your business is currently structured as a partnership and you elect to be treated as a corporation, your partnership will be liquidated. All of the liabilities and assets of your former partnerships will be sold for stock in the new corporation. This stock will then be distributed amongst the former partners.
When you decide to change your corporation to a partnership, the corporation will be dissolved. The assets and liabilities that were once owned by the corporation will be distributed to shareholders, who will then contribute these items to the new partnership.
A corporation that decides to be treated as a disregarded entity will allocate all of the company's assets and liabilities to one owner. Finally, when a disregarded entity that is separate from its owner decides to elect corporate tax status, the owner will contribute all obligations and assets to the corporation.
Form 8832 vs. Form 2553
Understanding the difference between Form 8832 and Form 2553 is of the utmost importance if you're interested in changing your business's tax status. Form 8832 can be used by a business entity that wishes to change its tax classification. So, if your business is structured as a partnership and you want to elect corporate tax status, you would use Form 8832. Form 2553 is specifically for traditional corporations that want to elect S corporation tax status.
Business entities are not required to elect a tax status, as the IRS will automatically tax businesses based on their default tax classification. You only need to use Form 8832 or 2553 if you're interested in altering your current tax classification.
Generally, non-corporation business entities will make use of Form 8832. Although it is possible to elect S corporation status using Form 8832, traditional corporations prefer to use Form 2553 to elect this status because it is made specifically for this purpose. Essentially, the form that you will use will depend on the new status that you wish to elect for your company.
Choosing the Right Tax Status for Your LLC
After formation, your limited liability company (LLC) will be assigned a default tax status by the IRS. If you have formed a single-member LLC, your organization will be taxed as a sole proprietorship. On the other hand, if your company is a multi-member LLC, the IRS will treat your business as a partnership. While you could accept these default classifications, your goal should be to pick a tax status that will provide you the biggest savings.
After doing your research, you may decide that a new tax status will be beneficial for your LLC, which means you'll need to file Form 8832. By filing this form, you can choose a new classification for your business, including:
- Sole proprietorship
- C corporation
- S corporation
Electing a new tax status can potentially save your LLC thousands on your annual tax bill, which is why this decision is so important.
Electing S Corporation Status with Form 8832
Corporations and other entities can elect S corporation status if they can meet certain qualifications. First, to elect S corporation status, your business must either be an entity eligible for corporate tax treatment or a domestic corporation. Second, your corporation cannot have more than 100 shareholders. If your S corporation ever grows to have more than 100 shareholders, you will lose this status and be treated as a traditional corporation.
Next, only certain entities can be shareholders of an S corporation, including estates, exempt organizations, individuals, and trusts. Nonresident aliens are not allowed to be shareholders in S corporations. Unlike traditional corporations, S corporations are only allowed to have one class of stock. Certain types of corporations are ineligible for S corporation status, such as:
- Banks that you use reserve accounting
- Insurance companies
- Corporations that have chosen to be treated as a possessions corporation
- Domestic international sales corporations or former DISCs
S corporations are also required to change their tax year to one of the following:
- A tax year that ends on December 31
- An ownership tax year or natural business year
- A section 444 tax year
Finally, all shareholders must consent to the S corporation election.
Reasons to Consider Not Using Form 8832
Form 8832 can only be used by some businesses. Here are a few businesses that filing Form 8832 may not be for:
- Insurance companies
- State-chartered banks (if FDIC-insured)
- U.S. or foreign corporations
- A business owned by a state or by a foreign government
- Tax-exempt organizations
- Real Estate Investment Trusts (REITs)
- Businesses that want to be taxed as S-Corporations
Reasons to Consider Using Form 8832
Partnerships and LLCs might benefit from filing Form 8832. Other businesses that may want to consider using the form are:
- LLCs or partnerships taxed as corporations because they previously filed Form 8832
- Foreign businesses that are associations taxed as a corporations
There is no deadline to file Form 8832. It can be filed anytime during a businesses' lifetime.
If a business wants to change its tax classification, the filing date is important! The change in tax status for the business is effective either:
- Up to 75 days before filing the form
- Up to one year after filing the form
- If no date is entered, the filing date is the effective date
Some businesses may still be able to benefit from a Form 8832 change outside of these time frames. The instructions for the form give more information about this option.
An LLC with one member does not file Form 8832. The business will continue to be taxed as a disregarded entity.
- Pro: Filing taxes is simpler for the owner.
- Con: The LLC may receive better tax treatment as a Corporation.
A Partnership or an LLC with at least two members might file Form 8832 to choose corporate tax status.
- Pro: Instead of each partner reporting their share of gains and losses, these are reported at the entity level. This may save money on taxes.
- Con: Individual partners may prefer partnership tax status.
- Businesses that want to change their tax classification to an S Corporation do not need to file Form 8832. Instead, they should file Form 2553.
- When a single-member LLC adds more members, the business will be taxed as a partnership. This is true unless the business files Form 8832 to change the classification.
Frequently Asked Questions
- How is Form 8832 different from IRS Form 2553? Businesses that wish to be taxed as S Corporations should use Form 2553. Form 8832 is for Partnerships and LLCs that wish to be taxed as a C corporation.
- If a partnership elects Corporate status with Form 8832, can one partner still choose to be taxed as a partnership? No. All partners and members must be taxed consistently - the same as the business.
Steps to File Form 8832
- Use IRS Form 8832
- Follow the instructions to complete the two-page form (three pages if "late election relief" is desired.) The instructions are part of the form.
- Every partner or member must sign the form. An authorized representative for the business must also sign.
- File the completed form with the IRS Service Center for your state. Also, send a copy of Form 8832 with your next business tax return.
- The IRS will either accept or deny the filing request. They will notify the business within 60 days with the decision.
If you are making a decision on whether or not filing Form 8832 is right for your business or if you need help setting up your LLC, you can post your legal question on UpCounsel's marketplace. Posting your legal question instantly gets you multiple free custom quotes from the top 5% of lawyers to help with your specific legal situation. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience including work with or on behalf of companies like Google, Menlo Ventures and Airbnb.