Form 8832 Business Classification Election – What Expats Need to Know
Americans who have a business registered abroad must report it to the RS every year when they file their US taxes.
Businesses registered abroad aren’t automatically classified in the same way as businesses registered in the States, and unless expats classify their business electively, they may find themselves with an unexpected IRS corporation tax bill.
IRS form 8832, The Entity Classification Election, is used to classify business entities for tax purposes, to avoid automatic classification. 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 partnership treated as a corporation for tax purposes
– a ‘disregarded entity’ treated as a corporation for tax purposes
The second of these classifications is most often useful to expats who are effectively freelancers trading through a corporation, or small business owners.
Why to use form 8832
US citizens have to report their foreign income and business activities whertever in the world they live, as well as filing a US tax return to report their global income.
A disregarded entity is a business that is treated as ‘disregarded’ for tax purposes. This means 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.
However, unless an election is made on Form 8832, a foreign-registered business may automatically be assumed by the IRS to be:
“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, Americans living abroad can 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 – it’s knowing whether to fill it in that normally requires a professional to ensure that it is the right decision given your wider circumstances.
You will to provide basic details of the entiry, such as it’s name, address, and EIN (Employer Identification Number). If you don’t have an EIN already, you will need to request one from the IRS. Having entered the entity information, you then have to tick the right boxes to elect how you want the business to be treated for tax purposes.
Once filled in, if you live overseas, form 8832 should be submitted to the Ogden, Utah IRS office, while a copy should also be attached to the company’s tax return for that year, or, if the company is being treated as a disregarded entity, to the business owner’s personal federal return.
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 tax specialist.