When you start a business, choosing the right organizational structure is key. Your business structure determines how your business is owned and operated.
Filing Form 8832 may be part of the process of starting a new business. However, even if your business is several years old, you can use IRS Form 8832 to change your current entity classification.
What is Form 8832, and why is it important? Let’s take a closer look at how it’s used, how to fill it out, and when you need to file it.
What is Form 8832?
Form 8832, Entity Classification Election, is used by business owners to choose an entity classification for a company. The classification you choose affects your tax status and how you can operate as a business.
You can also use Form 8832 to change your current classification. As long as you meet the IRS requirements for a particular tax status, you can fill out Form 8832 to switch at any time.
Note that there are also other small business tax forms you may need to file when you’re starting a business. You may have to apply for an employer identification number (EIN) and have your employees fill out an I-9 or W-4, depending on your business structure.
When should you use Form 8832?
If you’re starting a new business, you may need to file Form 8832 to select your business entity type. Once you choose an entity type, you don’t need to worry about filing Form 8832 again unless you want to make changes to your business.
If you decide to change, existing business owners would use Form 8832 to change their business entity type. In order to do this, you need to indicate the intent to change on line 1 of Form 8832 and answer the related questions.
Switching to a different business entity type can help when tax season arrives. Make sure you meet the requirements before switching to a different business tax status. If you change your tax status and violate the IRS requirements for that tax status, your tax status may be terminated. Working with a tax expert can help you avoid common mistakes when you’re filling out an 8832 form.
While you usually need to select a tax status for your business, that’s not always the case. If you’re satisfied with the default tax status of your entity or business, you don’t need to file Form 8832.
Choosing a business entity type
Before you can file small business taxes, you need to select a business entity type. Your business entity type affects how your business is owned, structured, and taxed, so it’s important to weigh your options and choose the right tax status based on your business.
You can use Form 8832 to file as a C-Corp, a sole proprietor, or a partnership. If the company elects to be treated as an S-corporation and meets all of the requirements, the company is required to file Form 2553.
You must weigh out the pros and cons of each type of business entity. Typically, a C-Corp status is ideal for larger businesses, but your small business may benefit from filing as a C-Corp thanks to a lower tax rate. And while you do have to pay self-employment taxes as an S-corp, you can use distributions to minimize what you owe.
If you are considering a partnerships or a sole proprietorship, you won’t have as many rules and regulations and taxes are typically simpler, which in turn, makes your life easier. However, it may not reduce your tax burden as much as an S-corp or C-corp can.
What are the benefits of filing an 8832 form?
When you’re starting a new business, filing Form 8832 is an essential step if you don’t want to be categorized as a sole proprietorship or partnership.
Keep in mind that you don’t need to file Form 8832 if you’re using the default tax status for your business.
If your business was automatically filed as a sole proprietorship or partnership, or you no longer want to stick with the status you chose when you started your business, you can file Form 8832 to update it.
If you want to simplify your business taxes, consider switching from a C-corp to a sole proprietorship or partnership. Your tax liability may increase, but you don’t have to deal with as many tax rules and regulations.
How to file Form 8832
You can file Form 8832 at any point during the year since there’s no deadline. While there’s no deadline for Form 8832, your tax status can’t take effect more than 75 days before filing Form 8832 and 12 months after filing.
Here’s a breakdown of the Form 8832 instructions if you’re completing and filing the form on your own:
Part I
After you’ve filled out your business name, address, and EIN, proceed to fill out the first section of Form 8832.
- Line 1 is the type of entity election you’re submitting. Select the box that applies to you and follow the instructions for your selection.
- Line 2 is where you determine your business’s eligibility. If you filed Form 8832 to change your entity classification in the last 60 months, your business isn’t eligible.
- Line 3 asks if your business has more than one owner. You can skip line 4 if you select yes or move on to line 4 if you select no.
- Line 4 asks for the name and identifying number of the single entity owner if you answered no on line 3.
- Line 5 asks for the name and EIN of the parent corporation if the entity is owned by one or more members of an affiliated group of corporations that file a consolidated return.
- On line 6, select the type of entity and classification that apply to you.
- Line 7 is only for organizations in a foreign jurisdiction. Domestic business owners can ignore this line.
- Line 8 is where you declare the date you want your election classification to take effect.
- Lines 9 and 10 are where you can add your contact information in case the IRS needs to contact you with questions about your application.
Part II
You only need to complete part II of Form 8832 if you didn’t file on time. While there’s no filing deadline, your tax status can only take effect up to 75 days before filing Form 8832 and 12 months after filing.
If you missed either of these filing deadlines, use this section to explain why you didn’t file on time. Provide a clear explanation of why you missed the filing deadline, and make sure this section is signed by owners, officers, managers, or members of your entity, as applicable.
You may be eligible for late election relief if:
- Form 8832 was not filed timely.
- Either:
- Your entity has not filed yet because the due date hasn’t passed for that year’s federal tax or information return, or
- The entity (or each affected person) has timely filed all required federal tax returns and information returns (or, if not timely, within 6 months after its due date, excluding extensions) consistent with its requested classification for all of the years the entity intended the requested election to be effective, and no inconsistent tax or information returns have been filed by or with respect to the entity during any of the tax years.
- The entity has reasonable cause for its failure to timely make the entity classification election.
- Three years and 75 days from the requested effective date of the eligible entity’s classification election haven’t passed.
If you’re not sure whether you qualify for late election relief, a tax expert can help you fill out Form 8832.
Where you’ll need to file your 8832 form will depend on where you live. Refer to the IRS directory for the mailing address you should use. In addition to mailing a copy to the proper Internal Revenue Service Center, you’ll want to attach Form 8832 to your entity’s federal tax or information return for the tax year of election.
Who needs to sign Form 8832?
Whether you operate an online boutique or a plumbing service company, every Form 8832 should be completed with the appropriate signatures. The signatures you need may depend on which type of entity you’re claiming.
Generally, Form 8832 should be signed by owners, officers, managers, or members of the entity you’re selecting a tax status for.
If your business or entity only has one owner, select no on line 3 and provide the name and identifying number of the owner. You don’t need any additional signatures if you’re the sole owner of your business.
When is Form 8832 due?
There’s no official deadline for Form 8832, but filing at the right time is important. The date you file determines when your entity classification takes effect. If you want to know when your entity classification will take effect based on when you file, a tax expert can help.
With TurboTax Live Business, get unlimited expert help while you do your taxes, or let a tax expert file completely for you, start to finish. Get direct access to small business tax experts who are up to date with the latest federal, state and local taxes. Small business owners get access to unlimited, year-round advice and answers at no extra cost, maximize credits and deductions, and a 100% Accurate, Expert Approved guarantee.
