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Form 8832: Entity Classification Election
Form 8832: Entity Classification Election
American laws allow several kinds of business entity formation so you can put your aspirations into reality. As an entrepreneur, you have many business structures to choose from according to your unique business needs like LLC, partnership, sole proprietorship, an S corporation or a C corporation.
Once you have a chosen business structure for your company, you must file federal and corporate taxes with the Internal Revenue Service (IRS). This is where the confusion starts. There’s a mountain of forms you need to file with the IRS. As a business owner, it’s also crucial to adhere to the regulations so that you don’t face any legal hurdles while running the entity.
But don’t be afraid; we’ve got you covered, at least when it comes to Form 8832, which is used to select how you want your business to be taxed. As a business owner, it’s also your responsibility to keep the expenses low, and Form 8832 can help you with that.
Table of contents
What’s Form 8832?...Read more
How to use Form 8832 “Entity Classification Election”...Read more
What’s the eligibility requirement for Form 8832?...Read more
Filing Form 8832 to be taxed as a C corporation...Read more
Filing Form 8832 to be taxed as an S corporation...Read more
Filing Form 8832 to be taxed as a sole proprietorship or partnership...Read more
How to fill Form 8832?...Read more
Filing a Form 8832...Read more
What’s Form 8832?
The IRS Form 8832 is for a corporation (like an LLC), a partnership or an entity that is disregarded as separate from its owner. For this reason, the form is used by corporations, limited liability companies (LLC) and partnerships to indicate and modify their tax classification with the IRS.
Your tax bill is influenced by how you want your business to be taxed and your goal must be saving so that you can reinvest the money or find a better use for it. Take advantage of tax tools, like a tax estimate calculator to help with taxes.
The selection for being taxed as an LLC or partnership depends on which one of the two will lead to a smaller tax bill. You file Form 8832 to change the classification to save on taxes.
How to use Form 8832 “Entity Classification Election”
Despite creating a complex web of regulations and forms, the IRS is quite thoughtful, and Form 8832 is one example of its thoughtfulness. Because this form gives you a chance to adapt according to the changing circumstances and status of your business.
For example, if your company filed as a C corporation for the 2022 tax year, lands in some financial trouble, and ends up making less money than the previous year, you can switch to being taxed as a partnership, an LLC or a sole proprietorship. Although the transition must satisfy certain requirements. For example, if you switch to being taxed as a sole proprietorship, you can only have one employee – who is also the owner. You'll still need to keep a track of your deductions, and you can use a tax deduction calculator to help.
The form below takes information about your name, employer identification number (EIN) and other details to check if a certain company is eligible.
Given that you satisfy these regulations, you can use Form 8832 to change the classification your business entity.
What’s the eligibility requirement for Form 8832?
Sole proprietors are not eligible to file this form. This is because they already reap the benefits of having only one employee and minimal paperwork to set up. C Corporations are also ineligible to file.
The filing deadline for Form 8832 is 75 days before the date of the election of the entity, which can be extended to 12 months after the election date. If you somehow miss the last date for filing the form, you can still file it, provided the reason is lateness alone and not some irregularity with your filing. In addition, the reason for the delay must be valid.
Filing Form 8832 to be taxed as a C corporation
If you’re already an LLC, you can choose to file as a C corporation. But keep in mind that a C-Corp is taxed separately from your income, which means that it has double taxation. Once when the company is taxed, the second is when you pay taxes on your income.
However, there are several advantages of a C Corp:
- You can write off many expenses like salaries, charitable contributions, health insurance premiums for employees, etc.
- Your tax cap is 21%, which can be less than the tax rate in case of pass-through taxes.
- Your assets are protected against company liability and debts.
- It is highly flexible in terms of paying your taxes during a financial year.
Filing Form 8832 to be taxed as an S corporation
Using the entity classification election, you can also choose to be taxed as an S Corp. Unlike a C corporation, an S corp allows pass-through taxes, and the owners can allocate a ‘reasonable salary’ to themselves. The benefits of an S corporation are:
- You can set up retirement plans from the company’s income.
- You can deduct healthcare premiums.
- You can avoid self-employment taxes from any distribution you receive from the company.
Filing Form 8832 to be taxed as a sole proprietorship or partnership
If you are an S corporation or C corporation, you can choose to backtrack and go back to being taxed as a sole proprietorship or partnership. This could be due to reasons like:
- You like the simplicity of a partnership in a multi-party setting.
- You broke up with your partners and want to work as a sole proprietorship.
- You don’t want to deal with a mountain of regulations.
How to fill Form 8832?
The IRS 8832 form has two parts. The first part has six questions to check your eligibility for a change of classification. This part also determines the number of owners in the corporation, their consent for changing the classification and employer identification number (EIN), the name of the owner(s) or the EIN of another corporation that is an owner. The owners, officers, managers, and stockholders of the corporation must sign part one of the form.
The second part of the form features the section to file the form after a deadline. It’s more for explaining the reasons for not filing the request to change the classification on time.
Filing a Form 8832
Once you have all the information in place, you can fill the form at one of the following two addresses:
- Department of the Treasury, Internal Revenue Service Center Kansas City, MO 64999
- Department of the Treasury, Internal Revenue Service Center Ogden, UT 84201
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