Selecting the correct taxable entity is an important decision that should not be overlooked. Many people don’t realize there are options available for entity selections. What about IRS Form 8832 vs 2553?
You may have recently set up a limited liability company or a corporation. That’s great. But how do you want that new company to be taxed? This is where the honest debate comes into play.
Form 8832 is used by a business that wants to change its default tax classification. For example, if your company is structured as a disregarded entity and you want to elect to be a C-corporation, you would file Form 8832. Form 2553 is used for entities that want to elect S-corporation status.
In this article, we will discuss the differences between these two forms and spell out a few situations in which you would use each form. Let’s get started!
Some Background
When you set up a corporation, it starts as a C-corporation. C-corporations are great for some folks but don’t work so well for most business owners.
The reason is that they are subject to double taxation. The company is taxed on its profits, and then the shareholder is taxed when dividends are distributed out of the company.
But a corporation does have the option to be taxed as an S Corp. S Corp. are subject to pass-through taxation. This means that the business does not pay tax. It merely flows through to the individual owners.
LLC starts off being taxed a little differently. They fall under what’s called default classifications. If there is one member or owner, it is taxed as a sole proprietor. Two members are taxed as a partnership.
But the good news is that LLCs have what they call to check the box rules. This allows you to elect to be taxed differently if you choose to.
IRS Form 8832 vs 2553
If you have a corporation and are OK with C Corp. taxation, or if you have an LLC and are OK with the default classification, then no additional entity classification is required. But what if you want to change the initial tax classification?
If you would like to change, you will need to consider filing a couple of forms. Form 8832 is what you file to be taxed as a C corporation, while form 2553 is what you file to be taxed as an S corporation.
What is form 2553?
If you’re looking for S-corporation status for your business, Form 2553 is required. You should file the form by the March 15 deadline for calendar year businesses. The process is rather straightforward
You will receive an acceptance letter usually within two months. You can check to see if you’ve filed it correctly by calling the IRS. Otherwise, the IRS will send you a notice of rejection. If you missed the deadline, you can still apply for S-corp status using a late relief election.
Form 2553 will ask you to give some general information about your business, including your company’s name, street address, room or suite number, and country. It will also require your EIN (Employer Identification Number) number.
Your EIN is the number assigned by the IRS to identify your company. You can find out your EIN by calling the IRS or by searching online. The IRS has published instructions for filing Form 2553 online.
In addition to providing the names of all shareholders, Form 2553 will also ask you to enter Social Security numbers and EINs for estates. If you’re a family-owned business, you can treat your relatives as one shareholder, which will result in no more than 100 shareholders.
If you have more than 35 shareholders, you can skip the second portion of the form by choosing option 3. If you have any questions, contact your legal representative to find out if you’ve filed properly.
Once your business has completed the S corporation application, you’ll have to file Form 2553 with the IRS. You must file the Form within two months after the start of your fiscal year. If you’re a newly formed business, you’ll need to file Form 2553 within the first 75 days.
If you’re not a new business, you can choose to file Form 2553 anytime, but you have to make your election by two months and fifteen days after your tax year begins. You’ll need to consider a number of factors when deciding which entity to use and which tax election status. You should consult with a knowledgeable business attorney who can guide you through this process.
What is form 8832?
What is form 8832? It’s an application to change your business’s tax classification from a corporation to a limited liability company. Most small businesses are partnerships or limited liability companies. These entities must file this form before their first federal tax return, or if their ownership structure changes.
The IRS form 8832 also reports the results of the election. It’s important to know the exact requirements for each type of business entity, because the tax rate they pay depends on the structure.
What is form 8832? An LLC may be taxed as a corporation or an S-corp. A sole proprietorship cannot use Form 8832.
IRS Form 8832 is the only form that requires taxpayers to file an election for a foreign country. If you don’t live in that country, you can download the form from the IRS website. Otherwise, you can have an accountant file the form for you.
In certain states, you must mail it to the IRS address. To make things even simpler, the IRS has made the form available for download on its website. There are some state specific requirements for filing a form 8832.
IRS Form 8832 vs 2553 Table
| Form 8832 | Form 2553 |
|---|---|
| Used for C-Corp Election | Used for S-Corp Election |
| Must be Mailed or Faxed | Reasonable Compensation Required |
| Subject to Double Taxation | Pass-Through Taxation |
| Allows Foreign Shareholders | Must be Faxed or Mailed |
Final thoughts
The key point to remember is that you file form 2553 if you are looking for S-Corporation tax status and file form 8832 if you want your LLC to be taxed as a C-Corporation. Comparing IRS Form 8832 vs 2553 is critical.
Entity selection is one of the most important parts of the tax planning process. If you select the wrong entity, many of your planning ideas will be challenging. Make sure you choose carefully!