IRS Form 8832: Entity Classification Election
As a U.S. taxpayer, you’re generally required to file a U.S. tax return and report your worldwide income to the IRS. If you’re a shareholder in a foreign company or a partner of a foreign partnership, you’re generally required to include the income you receive from the foreign company or foreign partnership (i.e. profit distributions) on your U.S. tax return. In addition, you may be required to file certain forms as part of your U.S. tax return, such as Form 5471 or Form 8865. As a shareholder or partner of an eligible foreign entity you can file Form 8832 to elect how it will be classified for U.S. federal tax purposes.
Entity Classification Election: What options do I have?
A legal entity is either fiscally transparent (disregarded), or not (not disregarded). A corporation generally is not fiscally transparent, whereas a partnership generally is. If a legal entity is fiscally transparent, the interest holder (partner) reports on his/her individual tax return his/her share of the income of the fiscally transparent entity, whether it is distributed or not. In other words, a fiscally transparent (disregarded) entity itself does not pay income tax on its profits, but instead each interest holder (partner) pays income tax on his/her share of the profits. On the other hand, a corporation (if it is considered not fiscally transparent), pays income tax on its profits. Only if it distributes its (after-tax) profits are its shareholders required to include those profit distributions on their income tax returns.
In short, therefore, there are three entity classification election options: Corporation, Partnership and Disregarded entity with a single owner. A foreign entity taxable as a corporation can have one or more shareholders. A partnership is a disregarded entity with more than one owner.
Are foreign entities eligible entities for Form 8832?
Default rules apply unless an election is made on Form 8832. A foreign legal entity is a partnership if it has two or more members and at least one member does not have limited liability. If all members have limited liability, it is taxable as a corporation. A foreign entity with a single owner that does not have limited liability is disregarded as an entity.
Otherwise, unless the foreign entity is defined or classified as a corporation (per se corporation), it generally is an eligible entity.
Why would I file Form 8832?
Completing and filing Form 8832 is not complicated. However, determining whether you should file Form 8832 is complicated. For example, if you’re a U.S. taxpayer living in Germany and you’re the only shareholder in a German limited liability company (GmbH), under the default rules described above, it will be considered not fiscally transparent. As a result, you’re generally required to file a Form 5471 as part of your U.S. tax return. If an election is made for the German limited liability company to be considered fiscally transparent, you’re generally required to include the GmbH’s income on Schedule C, which is filed as part of your tax return. From a U.S. federal income tax perspective, this may be intelligent, or not.
When and where to file Form 8832?
The classification election cannot take effect more than 75 days prior to the date Form 8832 is filed. In other words, the form must be filed with the IRS within 75 days from the date of incorporation/formation of the foreign entity. However, an entity may be eligible for ‘late election relief’ (of up to 3 years) if certain conditions are met.
Generally, a foreign entity with a foreign address files Form 8832 with the IRS in Ogden, UT. The original form isn’t filed as part of a tax return and it can’t be filed electronically. However, all shareholders/partners of the foreign entity must attach a copy of the form to their U.S. federal tax return.
If you are a shareholder in a foreign company or a partner of a foreign partnership, please contact us. We specialize in preparing U.S. tax returns for U.S. taxpayers with foreign income and assets, including Form 5471 and Form 8865. Contact us if you would like to know whether you should file Form 8832 for your foreign entity. We have offices in Denver CO, as well as in Germany, Switzerland, the United Kingdom and the Netherlands.