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U.S. Tax Form 8832 Entity Classification Election

Who Must Use This Form?

This form is not mandatory. It may be used by a domestic partnership or limited liability company or by a foreign corporation (in some jurisdictions), or by a foreign partnership or foreign limited liability company or by U.S. owned foreign corporations in certain jurisdictions. This election is not available to domestic corporations or to certain foreign corporations listed in IRS Regulations 301.7701-2(b)(8).

What Information Is Required?

This is a one page form that only requires the name, address and tax identification number of the entity, an election by "checking the applicable box" and a signature by the eligible members, partners or officers of the entity.

When is it Due?

According to the instructions, "... an election ... can take effect no more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date on which the election is filed."

The election is only applicable to an entire tax year. The instructions appear to mean that the election may be filed within a year before it is to be effective or within 75 days after the date it is to be effective. Thus, with a newly formed entity, this form should be filed within 75 days of the start of the fiscal year of the entity.

Where Should It Be Filed?

One copy should be submitted to the Philadelphia, PA office of the IRS and another copy should be attached to the income tax or information return of the entity making the election or with the Form 1040 of an individual if the entity elects to be treated as a disregarded entity.

How Long Does It Take To Prepare?

The IRS estimate of the preparation time is 17 minutes - which is likely to be fairly accurate. However, their estimate of the time required to learn about the applicable law is 1 hour and 41 minutes, which is likely to be a substantial understatement.

Why Comply ? (Penalties)

It is not necessary to file this form. It is to the advantage of some taxpayers to choose whether their entity is to be taxed like a partnership (multiple owners), as a corporation or is to be disregarded for tax purposes (single owner entity) and taxed like a proprietorship.

Comments

A corporation formed in the U.S. or in certain foreign countries is not eligible to elect the form of entity classification for tax purposes.

A domestic (U.S.) partnership or limited liability company (LLC) may elect to be taxed as a corporation. Without an election, a multiple owner domestic LLC will be taxed as a partnership and a single owner domestic LLC will be disregarded for tax purposes. (Income is to be reported on Form 1040.)

If a foreign corporation with multiple owners elects to be taxed as a disregarded entity, it will be required to file Form 8865 as a foreign partnership. If a single owner foreign corporation elects to be treated as a disregarded entity, then any business income of the entity should be reported on Schedule C of the owner's Form 1040. Investment income of the foreign corporation would flow through to the applicable forms such as Schedule A or Schedule E.

A foreign corporation may elect to be taxed as a foreign partnership (multiple members) or as a disregarded entity (single member) if it is not in a jurisdiction listed in IRS Regulations 301.7701-2(b)(8). Where a foreign corporation is to be used as an investment entity to hold foreign investments for U.S. investors, it is likely to be advantageous to make an election to be taxed as a foreign partnership or as a disregarded entity. However, a complete discussion of the advantages and disadvantages of this election can only be made with the advice of a qualified tax advisor or a study of the applicable tax regulations. If a foreign corporation elects to be taxed as a disregarded entity, then it will not be necessary to file Form 5471 .

A foreign partnership or foreign limited liability company may elect to be taxed as a foreign corporation (multiple owners) or as a disregarded entity (single owner.)

Assuming that the foreign entity has a bank account or some other form of financial account, Treasury Form TD F 90-22.1 is required to be filed (on June 30) and Schedule B, Part III, of Form 1040 is required to be checked "yes" since the shareholder has a beneficial interest in or signatory authority or other authority over a foreign account.

At the present time, there is some uncertainty as to whether U.S. persons are required to file any reports to disclose a transfer to a "disregarded entity" outside the U.S.. Where a single owner foreign corporation, IBC or LLC elects to be treated as a disregarded entity on Form 8832, the entity is treated for U.S. tax purposes as a proprietorship or branch. Any income or expenses are simply reported on Schedules A, B, C, D or E (Schedule E for rental income) of Form 1040 or on Form 1120. If a foreign corporation, IBC or LLC has multiple owners and elects to be treated as a partnership, for tax purposes, a Form 8865 is required to filed. However, the IRS wants U.S. persons to disclose all transfers to foreign entities or accounts. By filing a report with respect to transfers to foreign entities, problems with the IRS are avoided.

If a foreign corporation with multiple owners elects to be taxed as a disregarded entity, it will be required to file Form 8865 as a foreign partnership.

Copies of IRS Tax Forms and Instructions are available from their web site at
http://www.irs.gov/formspubs/index.html

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