Declassified: Navigating Entity Classification Elections (Form 8832)

From corporations, to limited liability companies, to partnerships, to limited liability partnerships, the plethora of legal entities that are available in the United States are generally widely known. 

What is not as well known, however, is the fact that eligible entities can elect to be classified a certain way for U.S. tax purposes. This election allows entities to choose a tax treatment that is different than its default treatment provided by IRC Sec. 7701 and Treas. Reg. Sec. 301.7701-3. 

For example, under the default classification, a domestic limited liability company (“LLC”) with at least two members is classified as a partnership for federal income tax purposes. However, if it chooses, it can elect to be classified and taxed as a corporation. Alternatively, a foreign corporation with two or more owners where all members have limited liability is treated as a corporation under the default classification rules. However, if it chooses, the entity may elect to be classified as a partnership for U.S. tax purposes. 

What is the process of electing to be classified differently than the default classification for federal tax purposes? And what might be the benefits of such an election? From administrative ease, to aligning tax and business objectives, to strategic tax planning, there are a multitude of potential benefits to making such an election. 

Entity Classification Election Process 

Once an entity has decided to make an election to utilize a classification other than the default classification for federal tax purposes, it is important to know the requirements and process of doing so. The most important, and necessary, part of the process is the completion and timely filing of Form 8832, Entity Classification Election.  

Form 8832 Entity Classifications  

Form 8832 allows entities to choose between three different classifications for federal tax purposes: 

1. One option is a corporation. Additionally, an entity that is a C corporation can elect to be treated as an S corporation, though that requires an additional election under Form 2553, which is outside the scope of this article.
2. A second option is a partnership. Entities with two members or more may choose this option. 
3. The third option is a disregarded entity. A disregarded entity is one in which the entity is “ignored” for federal tax purposes and its activities are reported on the owner’s tax return. This option is only for entities with a single owner.

Determining the Effective Date of the Election 

After an entity has decided on which classification it wants to elect, it must consider the effective date of such election. Form 8832 allows entities to select an effective date. If a date is not chosen, then the date on which the Form 8832 is filed becomes the effective date. It is important to note that under Treas. Reg. 301.7701-3(c)(1)(ii), the effective date cannot be more than 75 days prior to the date on which the election is filed or more than 12 months after the date on which the election is filed. If an election specifies a date more than 75 days prior to the date on which the election is filed, it will be effective 75 days prior to the date it was filed. If an election specifies a date more than 12 months after the date on which the election is filed, it will be effective 12 months after the date it was filed. 

Signing the Form 8832 

Another important aspect of the Form 8832 is determining who is authorized to sign it.  For timely entity classification elections, Form 8832 must be signed under penalties of perjury by either: 

1) each member of the electing entity who is an owner at the time the election is filed, or

(2) any officer, manager, or member of the electing entity who is authorized (under local law or the organizational documents) to make the election.   

If an election is to be effective for any period prior to the time it is filed, each person who was an owner between the effective date of the election and the date the election is filed who is not an owner at the time the election is filed must still sign the Form 8832.   

Finally, the entity must obtain an EIN from the IRS before making an entity classification election. Elections filed without an EIN will not be processed.   

Once an entity has chosen which classification it would like, has chosen its effective date, and has obtained an EIN and the required signatures, it is ready to file Form 8832 and request approval from the IRS. The IRS will notify the eligible entity if the Form 8332 is accepted or not.  If a response is not received after approximately 60 days, taxpayers should contact the IRS to inquire on the status of the election. It is recommended that Form 8832 is filed with the Internal Revenue Service via certified mail to prove that the Form was timely filed in relation to the requested effective date.   

The ability for entities to elect a certain classification for federal tax purposes may not be a well-known option, but by filing Form 8332, an entity can avail itself of potential business and tax benefits. If an entity believes that it may want to make such an election or if it missed an entity classification election and wants to discuss options for remediation, please consult with your tax advisor.