Taxes are among the most complex issues involved with setting up a small business. However, with the IRS Form 8832 – Entity Classification Election Form – you can get to decide how your business will be taxed.
If you’re just getting started or even considering a change in tax status, understanding this form will save you some bucks and simplify your tax.
What is IRS Form 8832 and why does it matter?
The IRS Form 8832 is a company form used by the firm for classification purposes to select how it desires to be taxed. Therefore, if an applicant does not file IRS Form 8832, the company is classified by the IRS by default according to its business structure. For example:
- Single-member LLCs are taxed as sole proprietorships.
- Multi-member LLCs are taxed as partnerships.
By using Form 8832, you can change your tax status to something that you might find more appropriate for your business, such as a C corporation. And selecting the right classification will, to a great extent, affect how much taxes you pay.
Who should file IRS Form 8832?
Not every business needs to file this form, but it is a must if:
- You are a U.S.-based LLC or partnership.
- You want to switch your default tax classification.
- You are a foreign entity eligible for U.S. tax elections.
If your business is already happy with its default tax status, there is no need to file. However, if you think a different classification could lower your taxes or better suit your goals, it is worth considering.
Step-by-step instructions for completing IRS Form 8832
This is how to fill out the IRS Form 8832:
Gather your business data
This includes:
- Business name and address.
- Employer Identification Number (EIN).
- The name and identifying number of the owner (if applicable).
Complete Part I
This section mainly deals with the election:
- Line 1. Indicate if this is the first election or if it is a change to an existing classification.
- Line 2. If a change from an existing election, state the previous classification.
- Line 6: Your tax classification choice, (partnership, C corporation)
Enter Effective Date
Line 8 tells you what date you want your new classification to take effect. Also keep in mind:
- It should not be more than 75 days prior to the filing date.
- It should not be more than 12 months after the filing date.
Request for late election relief, if applicable
If you happen to have missed the deadline for filing, you can request late election relief in Part II. Be ready to explain why the form was late and show that you meet the criteria.
Sign and Submit
Make you have filled out everything completely correct before signing. Then, send it to the designated address as enumerated on the IRS website under your area.
Read more: IRS Form 1138 Tax Extension in 2024: what is it, instructions, how to fill it out and where to apply
Where to apply for entity classification election
When you finish completing the form, you will have to mail it into the proper IRS office based on your state. You will see the mailing address in the Form 8832 instructions, make sure to double-check the location before sending. You may also want to file electronically if you prefer to do so.
How long does it take to process Form 8832?
It takes approximately two months for the IRS to evaluate and then respond to your request. You will subsequently receive a letter confirming whether your election was accepted or not. If there is no reply after this period, you may call the IRS to inquire further.
Why is choosing the right tax classification important?
Choosing the correct tax classification may have a lot of impact on your business. It determines how much tax you pay, your income reporting, and how you will handle deductions. The filing of Form 8832 ensures appropriate taxation of your business considering your financial goals.
By understanding and completing this form, you will be able to control your business tax and savings. Consult a tax professional if you are not sure which option suits your business best.
