Every opportunistic business owner seeks the best ways to make their business successful. And choosing to file Form 8832 is one of the most brilliant ideas. Businesses use Form 8832 to change their tax classification for federal tax purposes. In advance, filing Form 8832 can bring you unlimited tax treaty offers.
However, it could be tricky for inexperienced business owners to fill out the form. But there’s nothing to be worried about; We are here to help you. In this blog post, we are giving you the best guidance about the details and the filing procedure for IRS Form 8832. Keep reading.
What Is Form 8832?
The official name of Form 8832 is Entity Classification Election. Businesses submit Form 8832 to the IRS to choose their tax classification. Suppose you form an LLC, but by filing Form 8832, you can be taxed as a C corporation, a partnership.
Filling out Form 8832 allows a business to change its tax status. This tax status change can save you thousands of dollars a year in taxes.
Why Do You Need to File Form 8832?
Form 8832 has the most practical reasons to choose it. No business wants to pay excessive taxes. By choosing Form 8832 to file your taxes, you can save money while paying taxes. Also, you can get several benefits. We will describe how.
Some common and necessary reasons for wanting to file Form 8832 are given below.
- Tax Status Changing: You can change your tax status by filing Form 8832 with the IRS. You can change your current business entity to your desired entity, such as a corporation, to get the benefits of a corporation.
Similarly, you can change from a corporation to a partnership or sole proprietorship. You can also get tax benefits by changing your entity status. - Establishing a New Entity: By default, you should file taxes according to your newly formed business entity. However, if you want to establish a new business identity, you can file Form 8832.
Suppose you have a multi-member LLC, which will be treated as a partnership by default. However, by filing Form 8832, you can choose to be treated and identified as a corporation. - Establishing as a Disregarded Entity: When a business has only one owner and is not organized, it is designated as a disregarded entity for federal tax purposes. A single-member LLC is normally treated as a disregarded entity.
However, by choosing Form 8832, a single-member LLC can be treated as a corporation.
It is clear that tax classification (choosing your business identity for tax purposes) has important implications for your company. Your tax classification will determine how your company will be taxed and treated.
So, Form 8832 can be a cunning opportunity for certain businesses that want to be taxed as their own entities.
What Are the Form 8832 Instructions?
You can fall into a messy situation when you want to file Form 8832 because there are many things you must keep in mind. For you, we are here. To reduce your hassle, we will give a step-by-step guide on how to fill out Form 8832.
Which Business Entity Can File Form 8832?
Not all business entities can file Form 8832. We have listed the entities that can be qualified to file the form.
- Single-member LLCs.
- Multi-member LLCs.
- Other domestic entities – partnerships, C corporations.
- Foreign-owned entities – LLCs, partnerships, and C corporations (in certain jurisdictions).
- US-owned foreign entities (in certain jurisdictions).
Which Business Entity Can not File Form 8832?
- Sole proprietorships.
- Domestic S corporations.
- Foreign S corporations.
- QSub S corporations (owned by S corporations).
- Grantor trusts.
Eligible Business Entities To File Form 8832
Choosing a new tax status can greatly impact your business. So, choose an eligible business entity when electing one, such as a C corporation, partnership, or disregarded entity. The following list will guide you in selecting a business entity.
- Single and multi-member LLCs to C Corporations.
- Single and multi-member LLCs to S Corporations.
- Single-member LLCs to Sole Proprietor.
- Single-member LLCs to Disregarded Entity.
- Multi-member LLCs to Partnerships.
- Partnership to Corporation.
- C Corporation to Partnership.
- C Corporation to Disregarded Entity.
- Disregarded Entity to Corporation.
What Are the Form 8832 Requirements?
To complete Form 8832, you must provide some basic information about your business. That is –
- The eligibility (business eligibility of filing the form).
- Your business name.
- Your business address and other information.
- Authorized signature (an authorized person’s signature on behalf of your company).
- EIN (Employer Identification Number) of the business.
- Type of election (the tax status you choose for your business entity).
- Election effective date (the date of your entity’s election).
- Type of legal entity (choose the applicable legal business entity; Form 8832 is not for all types of legal entities).
How to File Form 8832 Online?
Although LLCs mainly use this form to reduce their federal tax, several business entities can file Form 8832 to be taxed as their desired business entity and get tax benefits. To file the form online, you have to download the file and send it via mail. Here’s the general process for filing Form 8832-
- Collect Form 8832: First, download a copy of Form 8832 from the IRS website.
- Fill Out the Form: You will need the required information, including the entity’s name, address, EIN, desired tax classification, and effective date of the election, to fill out the form. Form 8832 has a total of two parts to fill out.
- Part I: Election Information – In this part, you must put your business’s basic information, your previous business entity type, your elected entity type, your elected entity information, and the election date.
- Part II: Late Election Relief – This part is unnecessary for all. Part II is required when you need to provide additional information or explanations, such as setting an effective date, etc. But you should provide details regarding the reasons for the election.
- Part I: Election Information – In this part, you must put your business’s basic information, your previous business entity type, your elected entity type, your elected entity information, and the election date.
- Additional Document: You will need additional documentation or attachments while filing the form. These documents will depend on the type of entity and the elected business entity.
- Signature: Before the submission, every partner or member related to the company must sign the form. Also, an authorized person should sign the form on behalf of the company.
- Submit the Form: After completing the third form, 8832, you should submit the form via mail or fax. You can find the filing address and fax number in the instructions form.
- Keep a Copy: Make a copy of the Form 8832 you submitted since you never know when you might need it.
Benefits of Filing Form 8832
Filing IRS Form 8832 is a beneficial decision for eligible business entities. Different business entities get their expected benefits by changing their tax status. In most cases, LLCs grab the opportunity to get benefits. We listed some of the advantages below:
- Tax Benefits: The primary benefit of filing Form 8832 is choosing your business tax status. You can select your company’s most favorable tax treatment by picking your tax status.
- Clarify Business Identity: If your business doesn’t have a legal identity, you can classify it as having a formal identity by filing Form 8832. For instance, some disregarded business companies establish their identity by filing this form.
- Avoid Self-employment Tax: LLCs are taxed as S corporations, saving money by avoiding self-employment taxes.
- Liability Protection: Filing Form 8832 can provide limited liability protection to your company, depending on the chosen tax classification. For example, a disregarded entity can get liability protection by changing its tax status to a C Corporation if it files Form 8832.
- Raising Capital: When you change your tax status from LLC to C Corporation, you can raise capital for your company – because it’s easy to raise capital and funds in a C Corporation.
- Tax deduction: LLCs file Form 8832 to be treated as C corporations for the widest range of tax deductions.
- Business Growth: By choosing a favorable tax status, you can grab many business opportunities for your company.
- No Restrictions on Shares and Shareholders: LLCs are taxed as C corporations, with no restrictions on shareholders and shares. You can involve unlimited shareholders and as many stock shares as you wish.
- Other Benefits: By choosing your desired entity, you can get other benefits, including insurance, healthcare facilities, retirement plans, etc.
Drawbacks of Filing Form 8832
While filing Form 8832, there are some considerations you have to keep in mind. It could help you avoid any mistakes.
- Double Taxation: Changing from a different business structure to a C Corporation’s tax status can result in double taxation. A C corporation is subject to corporate and individual taxation despite its advantages.
- Accumulated Earnings Tax: Company owners employ several strategies to avoid overpaying taxes, which results in significant profit savings. That’s why a new law was passed that requires business owners to pay accumulated earnings tax on the money they leave in corporate bank accounts.
- Complex Process: Understanding and filing Form 8832 is challenging for regular business owners. To avoid any mistakes, you should consult with an attorney or business expert.
- Administrative Burden: Form 8832 requires additional administrative tasks and record-keeping requirements. To change your tax status, you need to comply with regulations.
- Certain Tax Benefits Ineligibility: When you change your business tax status, sometimes you may not be eligible for certain tax benefits. Because your company can’t qualify for those tax benefits.
Take Help From Experts!
If you’re ready to change your business tax status, we’re here to help. Business Globalizer has provided the best tax treatment for the last seven years. We can help you file your Form 8832 correctly and hassle-free. We have what you need to succeed, from company formation services to our dissolution service.
Our business experts can also analyze your business situation and suggest better opportunities for your business.
FAQs
Q1: When to file form 8832?
Answer: Form 8832 doesn’t have a deadline. It should generally be filed before the expected effective date of the election.
The effective dates are:
- Up to 75 days before you file the form.
- Up to one year after you file the form.
The rules for filing the form can change over time. You must check the instructions before submitting your form.
Q2: What are the late filing penalties for Form 8832?
Answer: There are no fines because the form is not generally required. But, if you don’t send in IRS Form 8832 on time, your request to change your business tax status will be turned down.
Q3: How much does it cost to submit form 8832?
Answer: There is no specific fee required for filing IRS Form 8832. However, you might need to pay for a business professional’s assistance while submitting the paperwork.
Q4: Where do I submit form 8832?
Answer: Your form submission address will depend on your state. You must submit one copy to one of the IRS offices’ addresses, and another copy must be attached to the entity’s income tax or information return.
Bottomline
If you own a foreign business that pays US taxes, Form 8832 could be the key to getting the most out of your tax return. And after reading this blog, we hope you know what you need to get started.
Before making any decisions about filing IRS Form 8832, consult a qualified tax professional who can guide you based on your business situation and the applicable tax laws.
