Form 8832, ‘Entity Classification Election’
Eligible foreign and domestic entities use the Form 8832 to elect how it will be classified for Federal tax purposes. If the entity is an ‘eligible entity’, the entity can elect to be treated as a corporation, partnership, or an entity disregarded as separate from its owner.
Only ‘foreign eligible entities’ can elect a classification. If the foreign entity is not a ‘per se’ corporation it is a ‘foreign eligible entity’ that may select a US tax classification using the Form 8832.
The foreign eligible entity uses Form 8832 to elect how it will be classified for federal tax purposes. The can elect to be treated as
· a corporation,
· a partnership, or
· an entity disregarded as separate from its owner.
Within 60 days of receiving the election, the IRS will notify the eligible entity if the election has been accepted or not accepted.
Certain foreign entities must be treated as corporations. If the foreign entity type is on the IRS list of ‘per se’ corporations, it must be treated as a corporation for US tax purposes (Treas. Reg. §301.7701-2(b)(8)(i)). This list can be found in the instructions to Form 8832 ‘Entity Classification Election’. Check the IRS website for any additions to this list.
Example: A German ‘Aktiengesellschaft‘ and a UK ‘Public Limited Company’ are both on the IRS ‘per se’ corporation list. As a result, they are ineligible to select an entity classification and must be treated as a corporation. As a corporation, the entity will need to determine if a Form 5471, ‘Information Return of U.S. Persons with Respect to Certain Foreign Corporations’ will need to be filed.
If no election is made, the default rules will apply to determine the classification. An eligible entity by default is:
· A partnership if it has two or more members and at least one member does not have limited liability.
· An association taxable as a corporation if all members have limited liability.
· Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.
The Form 8832 must be timely filed. The election must be filed between one year prior and 75 days after the requested effective date.
Late election relief is available under Rev. Proc. 2009-41 if all the following requirements are met:
· Form 8832 was not timely filed after entity formation or after the intended change of classification.
· No return has been filed because the due date has not passed (a newly formed entity), or timely returns have been filed by the entity (or owners) consistent with the requested classification for all relevant years and no inconsistent returns have been filed.
· Reasonable cause exists for failure to file Form 8832.
· Three years and 75 days from the requested effective date have not passed.
If Rev. Proc. 2009-41 cannot be used, an entity seeking relief can apply for a private letter ruling and paying a user fee per Rev. Proc. 2021-1.
Late relief granted for late filing of entity selection Form 8832, IRS Letter Ruling 202111010 (Dec 22, 2020)
Entity X, owned by a Y a US domestic Company, was formed under the laws of Foreign Country. Entity X elected to be disregarded as an entity separate from its owner for US federal tax purposes. Entity X represented that Y had always intended X to elect to be a DRE and consistently filed returns as if X properly elected to be a DRE. X failed to timely file the Form 8832.
A request for relief will be granted when a taxpayer provides evidence to establish to the satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good faith, and (2) the grant of relief will not prejudice the interests of the Government. The IRS agreed that all requirements of late election relief were met and granted an extension of time of 120 days from the date of the PLR to file the Form 8832.