Form 8832, officially known as the “Entity Classification Election,” allows eligible entities to choose how they are classified for federal tax purposes. If you are a US citizen living abroad and managing a business entity, understanding Form 8832 can be critical to your overall tax strategy.
This guide provides a comprehensive overview of Form 8832, its use, and how filing it can help US expatriates make informed decisions about their business classification for tax purposes.
What Is Form 8832?
Form 8832 is the tax form used to make an entity classification election with the Internal Revenue Service (IRS). It enables eligible entities to elect their federal tax classification—typically choosing between being taxed as a disregarded entity, partnership, or corporation (either an S corporation or a C corporation).
Without filing Form 8832, an eligible entity is assigned a default classification based on the number of owners and the entity type. For instance, a single-member LLC is treated as a disregarded entity, while a multi-member LLC defaults to a partnership.
What Is an Entity Classification Election?
An entity classification election is the formal process of selecting a tax classification for your business. When you file Form 8832, you’re requesting the IRS to classify your business in a way that may differ from its default tax classification. This election is crucial for U.S. citizens abroad who may have tax advantages in electing a different structure.
Who Can File Form 8832?
Only an eligible entity can file Form 8832. An eligible entity is any business entity that is not automatically treated as a corporation for federal tax purposes. This includes:
- Limited liability companies (LLCs)
- Foreign entities
- Domestic eligible entities
- Newly formed businesses
- Existing businesses
These entities must have either a single owner or two or more owners, which affects their default classification.
Why File Form 8832?
Filing Form 8832 provides flexibility in choosing how your business is taxed. As a U.S. citizen living abroad, selecting a different tax classification may align better with your international tax situation. Common reasons to file Form 8832 include:
- Changing from a disregarded entity to a corporation
- Electing S corporation status for pass through taxation
- Reducing self employment tax obligations
- Avoiding double taxation by electing a flow-through structure
Tax Classifications Available With Form 8832
When filing Form 8832, eligible businesses can choose one of the following federal tax classifications:
1. Disregarded Entity
Used when there’s only one owner. The entity’s business income is reported directly on the owner’s personal tax return. This option is simple but may result in self employment tax exposure.
2. Partnership
Applies when the entity has two or more owners. Business income is reported on a partnership tax return and passed through to owners’ personal tax returns.
3. C Corporation
A separate entity for tax purposes. The corporation pays its own taxes, and shareholders pay tax on distributions, leading to double taxation. Suitable for some foreign businesses or those seeking tax advantages of retained earnings.
4. S Corporation
Permits pass through taxation, avoiding double taxation. However, strict eligibility rules apply. A separate tax form is required, and a corporation income tax return must be filed.
How to File Form 8832
Filing Form 8832 involves several steps:
- Determine eligibility as an eligible entity.
- Select the desired tax classification that fits your business structure and goals.
- Fill out the form accurately, including the effective date of the election.
- Mail the completed form to the appropriate IRS address.
Your filing date must be within 75 days of the effective date or up to 12 months in advance. If you miss this window, you may need to request late election relief.
Effective Date
The effective date you choose can be retrospective (up to 75 days) or prospective (up to 12 months). It determines when the new classification applies.
Late Election Relief
If you missed the filing deadline, you can request late election relief. This involves a reasonable cause statement explaining the delay and demonstrating that you acted reasonably and in good faith.
Impact on Tax Returns and Tax Filings
Changing your tax classification affects how you prepare your tax returns. Depending on your election, you may need to file:
- Form 1040 with Schedule C for disregarded entities
- Form 1065 for partnerships
- Form 1120 for C corporations
- Form 1120S for S corporations
Proper tax filings are essential to avoid IRS penalties and maintain compliance.
Special Considerations for U.S. Citizens Abroad
U.S. citizens living abroad often manage foreign entities or business operations with different tax implications. When evaluating how to file Form 8832, consider:
- Foreign businesses may be treated as an eligible entity under U.S. law
- Certain foreign businesses have default classification rules that may not be favorable
- A different tax classification can lead to different tax implications
- You may need to pay tax on worldwide income, so report business income carefully
- Consult tax professionals with expertise in international tax issues
Examples of When to Use Form 8832
Example 1: Single Member LLC
A U.S. citizen abroad forms a single member LLC. By default, it is a disregarded entity. If the business wants corporate tax treatment for tax savings, it must file Form 8832.
Example 2: Foreign Entity
An expat owns a foreign entity that qualifies as an eligible entity. The default classification results in unfavorable taxation. Filing Form 8832 allows a more beneficial classification.
Example 3: Multi Member LLC
Two or more owners operate a multi member LLC. By default, it’s treated as a partnership. If the owners prefer corporate status, they must file Form 8832.
Important Definitions
- Eligible Entity: A business that can elect its tax classification.
- Disregarded Entity: A business with only one owner that is not separate from the owner for tax purposes.
- Default Tax Classification: The automatic classification assigned by the IRS unless you file Form 8832.
- Federal Tax Classification: How the entity is taxed under federal rules.
- Entity Disregarded: Another term for disregarded entity.
- Association Taxable: A term used to refer to corporations for federal tax purposes.
Filing Form 8832 vs. Other IRS Forms
While Form 8832 handles entity classification elections, it differs from other forms:
- IRS Form 2553 is used to elect S corporation status specifically.
- IRS Form 1065 is the partnership tax return.
- IRS Form 1120 and 1120S are for C and S corporations.
Choosing the right form is part of an overall tax strategy. Sometimes both Form 8832 and Form 2553 must be filed for S corporation status.
What to Include When Filing Form 8832
When filing form 8832, include:
- The entity’s name and EIN (employer identification number)
- The effective date of the election
- The new tax classification selected
- Signature of an authorized officer
- Reasonable cause statement (if requesting late election relief)
Benefits and Risks of Filing Form 8832
Benefits
- Flexibility in choosing a tax classification
- Potential tax advantages for expats
- Ability to align tax structure with business goals
- Possibility to minimize double taxation
Risks
- Improper filing can lead to IRS penalties
- Missed deadlines may require late election relief
- Changing classification impacts your tax filings and business income reporting
When to Seek Help
If you’re unsure how your foreign or domestic eligible entity should be classified, consult a tax advisor or tax professionals with experience in international tax law. This is especially important if:
- Your business operates in multiple jurisdictions
- You are unsure about the default classification
- You wish to change your tax status for tax savings
- You need to request late election relief
Get Expert Help with Form 8832 — Free Tax Advice for U.S. Expats
At 1040 Abroad, we specialize in helping U.S. expats navigate complex tax issues like filing Form 8832 and making informed entity classification elections. Our team understands the unique challenges that come with running a business from overseas, and we’re here to ensure you get the right tax treatment with minimal hassle.
We are committed to providing free tax advice to all U.S. citizens living abroad—no strings attached. Whether you’re considering a different tax classification, need help requesting late election relief, or want to understand the tax implications of your current structure, we’re here to guide you.
