IRS form 8832, The Entity Classification Election, is used to classify business entities for tax purposes. In laymen’s terms, this means that you can use form 8832 to choose to have:
- a corporation with more than one owner treated as a partnership for tax purposes
- a corporation with a single owner treated as a 'disregarded entity' for tax purposes
- a 'disregarded entity' treated as a corporation for tax purposes
When and why to use form 8832
US tax payers have to report their foreign income and business activities whether they live in the US or not.
A disregarded entity is a business that is treated as 'disregarded' for tax purposes, meaning that the company reports through the individual's federal income tax return, with no separate corporate filing necessary. US-registered single owner limited liability companies are automatically considered disregarded entities.
“US owners of foreign subsidiaries can benefit from electing to have those foreign subsidiaries treated as disregarded entities.” - The IRS
- A partnership, if it has two or more members and at least one member doesn't have limited liability.
- An association taxable as a corporation, if all members have limited liability.
-. A disregarded entity separate from its owner if it has a single owner that does not have limited liability.
As such, to avoid separate corporate filing for a foreign limited liability company with a single owner, you should file form 8832 to elect to have it treated as a disregarded entity. Similarly, it may be beneficial to reclassify a foreign limited liability company with multiple owners as a partnership for tax purposes.
Completing and filing form 8832
Form 8832 is a relatively straightforward form to fill in (the IRS estimates that it takes just 17 minutes!), although you will need to request an employer identification number if you don’t already have one. You must include the company information, and then tick boxes to elect how you want the business to be treated for tax purposes.
Once a foreign limited liability company has been classified as disregarded entity for tax purposes, the owner should fill in and file form 8858 with their form 1040 each year to maintain this disregarded status.
Form 8832 can only be filed once every 60 months for any business so it's important to carefully consider the implications of changing the tax status of a business before filing it. If necessary, seek advice from an expat taxes specialist.