irs default entity classification and form 8832

In handling international tax matters, we often come across United States-based companies with foreign owners seeking to be taxed at lower rates under the terms of a tax treaty between the United States and the country in which the company conducts business. This can be done by obtaining Form 6166, US Tax Residency Certification, which is one of the services we provide. However, when filing for US Tax Residency Certification, it may be a good idea to consider how the IRS classifies your business.

The IRS has a default classification for all newly-created businesses. A newly-formed domestic entity, including an LLC, is classified as a partnership if it has two or more members or as a disregarded entity if it has one owner. In both instances, income made by the entity is passed through to its member-owners.

With foreign entities, the rules get a little more complex. By default, the IRS taxes foreign entities in which at least one member does not have limited liability (i.e. that member is personally responsible for the debts and obligations of the entity), as a partnership. If all members of the entity have limited liability (ie. no members are personally responsible for the debts and obligations of that entity), the entity is taxed as a corporation. The limited liability rule is applied to single-member owned entities, with those who have limited liability taxed as corporations and those who do not (i.e. those who are personally responsible for the debts and obligations of the entity) taxed as disregarded entities.

Are you locked into the default classification for the entire existence of your company? By no means! This is where the magical Form 8832 comes in, with which you can change the way the IRS taxes your company. You can select whether you would like to be taxed as a separate corporation or as a pass-through partnership or disregarded entity. This form must be filed no earlier than 12 months before the election but also no later than 75 days before electing to be taxed in one way or the other. Exceptions can be made for certain late filings.

Most business owners file Form 8832 shortly after forming their corporation. Since many foreign single-member US LLC owners frequently do not realize that they will be taxed as a disregarded entity by default, required to personally pay United States federal, state, and local income taxes by filing Form 1040-NR and the appropriate state and local income tax forms if necessary. Three popular states for forming LLC in the United States include Delaware, Wyoming, and Nevada. Wyoming and Nevada have no state of local income taxes, but Delaware has a personal state income tax (payable by filing form PIT-NON), and if your company derives income from the City of Wilmington, you would also need to pay the Wilmington Net Profits Tax by filing Form WCWT-6.

A&M Logos International can help you prepare and file Form 8832 to classify your company as you see fit. We can also assist you with obtaining your IRS United States tax residency certification for use abroad if you would like to take advantage of an income tax treaty and lower the income and VAT taxes you pay abroad. Call us today at (212) 233-7061 or e-mail us at for a free consultation on the best course of action for your business.

Anton Vinogradov Written by:

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