Many business owners wish they can find ways on how to minimize their tax liabilities. With Form 8832, you might just be able to achieve that. Keep reading to find out more about form 8832 entity classification election and how you can use it to change your business’s tax classification.
What is Form 8832?
8832 is an IRS entity classification election document that businesses use to designate how they want to be classified for tax purposes (Partnership, Corporation, etc.). Notably, this form is used by businesses to alert the IRS that they are moving from their default tax classification.
Why file Form 8832?
If you are content with your present tax status, you don’t need to fill this form. However, many Limited Liability Companies (LLCs) can cut their tax burden by altering the default tax classification they were allotted when they were initially established.
See, businesses that disregard the 8832 (Entity Classification Election) might be assigned a default tax status, resulting in owners paying unnecessary taxes. Thus, changing your tax election classification can significantly save you thousands of dollars annually.
Typically, a business entity that fills out an Entity Classification Election form is an LLC that wishes to be taxed or categorized as a C-corporation. Generally, a single-member LLC would be classified and taxed as a disregarded entity. On the other hand, multiple-partner LLC would be categorized and taxed as a partnership.
Filling out the 8832 lets you change your business’s tax classification so that the losses and profits made are not transferred to your personal income tax returns.
Eligibility Criteria to make an 8832 election
Only eligible businesses, plus U.S.-based LLCs, U.S.-based partnerships, and certain foreign entities may file an 8832 to elect to be taxed as a partnership, sole proprietorship, and C-corporation.
Of course, as we mentioned earlier, if you are happy with your current tax status, there is no reason for filing an 8832. Also, note, while the form may be used to alter your tax status to a C-corporation, you will have to fill a separate form, the 2553 form, if you wish to be taxed as an S-corporation.
Here are some businesses that filing 8832 may not be for:
- State-chartered banks (Banks whose deposits are covered by the Federal Deposit Insurance Act)
- Insurance companies
- S. or foreign corporations
- Tax-exempt organizations
- A business owned by a federal or state government
- Businesses that wish to be taxed as S-Corporation
- Real Estate Investment Trusts (REITS)
Deadline for filing Form 8832
There is no reserved deadline for filing the 8832 IRS form. However, the date you file it matters a lot since it will influence when your new tax status kicks in. For example, according to the IRS, your new status cannot become effective more than 75 days prior to the date the filing took place or later than one year (12 months) after filling.
Form 8832 Instructions
You can find form 8832 Instructions and a downloadable PDF version of the form on the official IRS website.
Form 8832 Instructions as well as the 3-page digital version of the form can be found on the official IRS website.
Before you start filling the 8832 out, you need to have the following information close:
- Business name, phone number, and address
- Owner’s name and SSN (if the business has only one owner)
- Employer Identification Number (EIN)
The form has two parts:
- Part I (Election information) – This part asks questions relating to your tax status election.
- Part II (Late Election Relief) – This part is meant for businesses seeking late election relief
Part I: Election Information
Line 1 (a) asks whether you are filing to alter your tax status for the very first time. Line 1 (b) determines if you are an existing entity seeking to make a subsequent change.
Line 2 (a) & (b) seeks to know if you have ever filed to alter your status within the last five years (60 months). If you have, unfortunately, you will not be eligible to change the election.
Line 3 – Indicate here if you are a multiple-owner LLC or single-owner LLC. If you are a single-owner LLC, proceed to line 4. But if you are a multiple-owner LLC, proceed to line 5.
Line 4 – Provide the EIN and name of the single-member owner here
Line 5 – Provide the EIN and name of the parent corporation here
Line 6 – Pick the kind of entity you wish to elect, with preferences available for foreign and domestic entities. The options available include:
- If you are U.S-based, check (box a) if you wish to be taxed or categorized as a corporation, (box b) to be taxed or regarded as a partnership, and (box c) if you want to be taxed as a sole proprietor.
- If your business is foreign-based, check (box d) if you wish to be taxed or regarded as a corporation, (box e) to be taxed under a partnership, and (box f) if you want to be taxed as a sole proprietor.
Line 7 – If you are foreign-based, you should indicate here the name of the foreign country.
Line 8 – This is the line to indicate the date you want the election to take effect.
Line 9 & 10 – provide the title, name, and address of someone that the IRS can contact for additional information.
Finally, the signature(s) and Consent Statement section should be filled out by
- Every company shareholder,
- Or a manager, an officer, or member authorized to act on the company’s behalf
Note; the IRS issued a news release on Aug 28, 2020, approving the use of digital signatures for certain IRS documents that were previously being filed manually. Worth mentioning, this list of documents or forms includes IRS Form 8832.
According to the news release, the IRS has introduced this change to minimize the in-person contact, thus reducing the risk of tax professionals or taxpayers contracting COVID-19. So, while these forms will still need to be mailed to the IRS, a layer of physical contact has potentially been abolished by allowing digital signatures.
Most importantly, a digital signature solution like eSign Genie can ease the administrative struggles associated with IRS forms execution. For instance, 8832 form usually presents administrative burdens when the form is not for a U.S.-based entity, and the other responsible signatory is located elsewhere. In such a case, there are always delays associated with couriering or mailing of the executed forms internationally.
By utilizing eSign Genie’s web-based solution, you can perform all crucial edits to 8832 PDF form online and create your personalized digital signature within seconds, regardless of where you are based. A lot of time is saved, and logistic-associated problems are eradicated as a result!
Part II: Late Election Relief
If you cannot file 8832 on time and need the election to become effective 75 days before the filing date, you can fill out this part to apply for late-classification relief.
To qualify, you should have a “reasonable cause” for not meeting the deadline, and have filed all your other taxes on time.
Line 11 – Explain here why you missed the 8832-filing deadline. This part should also be signed by the same people or person who signed part I.
The change and election of tax status are exceedingly crucial for businesses, but we recommend that you find solid tax advice before making any major decisions.
Lastly, it’s time you forgot about printing and scanning out IRS forms. Take advantage of eSign Genie today, and easily edit and sign form 8832 online.