IRS Form 8832: A Guide for Small Business Tax Compliance

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• February 19, 2025
• 6 min read

Understanding Form 8832 and Its Importance

Form 8832, known as the Entity Classification Election, enables eligible businesses to select their federal tax classification. This election determines whether the Internal Revenue Service (IRS) taxes your entity as a corporation, partnership, or a disregarded entity (an entity not separate from its owner for tax purposes). Making the appropriate election can align your tax responsibilities with your business goals and potentially offer tax advantages.

Key Takeaways

• Understanding Form 8832: Learn the purpose of Form 8832 and how it affects your business’s tax obligations.
• Filing Process: Step-by-step guidance on completing and submitting Form 8832 accurately.
• Common Pitfalls: Identify and avoid frequent mistakes that can lead to processing delays or penalties.

Default Classifications and the Need for Election

When a business is formed, the IRS assigns it a default tax classification based on its structure. However, this default status may not always align with the business’s financial and operational goals, which is where Form 8832 comes into play.

Default IRS Classifications

The IRS automatically classifies entities as follows:

• Single-Member LLCs (Limited Liability Companies): Treated as a disregarded entity for tax purposes, meaning the business’s income and expenses are reported directly on the owner’s personal tax return (Schedule C for sole proprietors).
• Multi-Member LLCs: Classified as a partnership, requiring the business to file a Form 1065 (U.S. Return of Partnership Income) and issue Schedule K-1s to members.
• Corporations: Automatically classified as C corporations, which are subject to corporate income tax unless the business elects S corporation status via Form 2553.

When Should You File Form 8832?

A business may choose to change its tax classification to achieve a more favorable tax structure, reduce liabilities, or simplify tax reporting. Here are common scenarios where Form 8832 is used:

1. LLCs Electing Corporate Taxation
   • A single-member or multi-member LLC may elect to be taxed as a C corporation to retain earnings and potentially benefit from lower corporate tax rates.
   • An LLC wishing to be treated as an S corporation must first elect C corporation status via Form 8832 before filing Form 2553.
2. Foreign Entities Choosing U.S. Tax Treatment
   • Foreign businesses operating in the U.S. can use Form 8832 to determine their classification for tax reporting, potentially reducing double taxation risks.
3. Partnerships Electing Corporate Status
   • Partnerships that prefer to be taxed as corporations, rather than pass-through entities, can file Form 8832.

Important Considerations

• 60-Month Restriction: Once an entity changes its classification using Form 8832, it generally cannot change it again for five years unless there is a valid reason.
• Retroactive Election: If the election is filed within 75 days of the intended effective date, it can be applied retroactively.

Step-by-Step Guide to Filing Form 8832

1. Obtain the Form: Download Form 8832 from the IRS website. Ensure you have the latest version to comply with current regulations.
2. Complete Part I – Election Information:
   • Line 1: Indicate whether the election is for a newly formed entity or a change in current classification.
   • Line 2: Specify the desired classification (e.g., corporation, partnership, disregarded entity).
   • Line 3: If applicable, provide information about the entity’s owner.
   • Line 4: State the effective date of the election. Note that the effective date cannot be more than 75 days prior to the filing date or more than 12 months after the filing date.
3. Complete Part II – Late Election Relief (if applicable): If you’re filing the form after the desired effective date, you may request late election relief by providing a valid reason for the delay.
4. Sign and Date the Form: An authorized representative must sign and date Form 8832 to validate the election.
5. Submit the Form: Mail the completed form to the appropriate IRS address based on your entity’s location. Refer to the IRS guidelines to determine the correct mailing address. Additionally, attach a copy of Form 8832 to your federal tax return for the year in which the election is effective.

Common Mistakes to Avoid When Filing Form 8832

Filing Form 8832 is a crucial step in ensuring your business is taxed in the most advantageous way. However, errors in filing can lead to IRS processing delays, unintended tax consequences, or even a rejected election. Below are some common mistakes to avoid:

Missing the 75-Day Retroactive Election Window

• The IRS allows businesses to make a retroactive election (backdating the classification change) as long as the form is filed within 75 days of the desired effective date.
• If you miss this window, your election will only take effect on the filing date or a future date, potentially leading to unwanted tax treatment for past months.

Tip: Always double-check the effective date and submit the form on time to avoid default classifications.

Selecting an Ineligible Classification

• Certain business structures cannot choose specific tax classifications. For example:
  • A sole proprietorship cannot elect partnership status.
  • An S corporation (S-Corp) cannot use Form 8832 to change classification; it must file Form 2553 instead.
• Additionally, foreign entities may have limited classification options based on IRS regulations.

Tip: Review the IRS “Eligible Entities Table” (available in Form 8832 instructions) to confirm your business is eligible for the classification you want.

Incorrectly Completing the Responsible Party Section

• Part I, Line 5: This line asks for the name and title of the responsible party. This should be:
  • A member (LLC)
  • A general partner (partnership)
  • A corporate officer (corporation)
• Submitting the form without a proper signatory can lead to rejection.

Tip: Ensure that the person signing Form 8832 has legal authority to make the tax classification election.

Forgetting to Attach a Late Election Reason (If Applicable)

• If you’re submitting Form 8832 after the 75-day retroactive deadline, the IRS requires a reasonable cause statement explaining the delay.
• Failing to include this explanation can result in the IRS denying the election request.

Tip: Clearly state why the election was filed late (e.g., clerical errors, miscommunication with an accountant) and demonstrate that reasonable steps were taken to correct the issue promptly.

Not Keeping a Copy for Your Records

• Businesses often assume the IRS will maintain all records, but the agency does not send confirmation when Form 8832 is approved.
• If you lose your copy, you may struggle to prove your entity’s classification in case of an audit or tax dispute.

Tip: Keep a copy of the filed Form 8832 and any correspondence from the IRS for at least five years.

Failing to Notify State Tax Agencies

• Some states do not follow federal tax elections, meaning that even if the IRS accepts your Form 8832, your state may still tax you under a different classification.
• For example, an LLC electing corporate taxation may still be taxed as an LLC at the state level.

Tip: Check with your state’s Department of Revenue to determine if additional state tax filings or notifications are required. For more information on state extensions, visit FileLater.

FAQs

Q1: What entities are eligible to file Form 8832?
A1: Eligible entities include domestic and foreign businesses that are not automatically classified as corporations and wish to elect their tax classification. This typically includes LLCs and other unincorporated entities.

Q2: Can I change my entity’s classification after making an election?
A2: Yes, you can change your entity’s classification by filing a new Form 8832. However, once an election is made, you generally cannot change the classification again within 60 months without IRS approval.

Q3: What happens if I don’t file Form 8832?
A3: If you don’t file Form 8832, your entity will be taxed based on the default classification set by the IRS, which may not align with your business objectives or offer the most favorable tax treatment.