June 22, 2020

By Joshua Ashman, CPA & Nathan Mintz, Esq.

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Form 8832 and the Check-the-Box Election

For U.S. expats with businesses abroad, tax planning is essential to ensure that your company is operating tax efficiently.

Tax efficiency can be tricky for U.S. expats, because multiple taxing authorities will most likely play a part in how you and your business are taxed.

In some instances, modifying the U.S. tax classification of your company is a good way to reduce your overall U.S. tax burden without upsetting your local tax position.

In this blog, we discuss why entity tax classification is an important consideration for your company. We then dive into the technical mechanism for changing your company’s U.S. tax classification using the IRS Form 8832.

Why is US Tax Classification Important?

Determining your company’s U.S. tax classification is much more than just an academic exercise. Tax classification can have a number of important practical effects, including:

1. how you and your company are taxed (for example, tax rates may be higher or lower depending on the company’s classification); and

2. the extent to which you and your company have compliance or reporting obligations (for example, additional forms may need to be filed with your IRS Form 1040 depending upon the company’s classification)

To give an example, a U.S. expat who owns a non-US company is likely subject to the U.S. “controlled foreign corporation” rules, which trigger automatic owner-level taxation of foreign company earnings at potentially maximum rates in the United States. It also triggers the obligation to file additional CFC-related forms with the tax return.

In such a case, a Form 8832 entity classification election could reduce these negative effects, depending on the particular circumstances of the business owner, company operations, country of residence, and the provisions of the applicable tax treaty.

A Form 8832 Check-the-Box Election

Fortunately, the IRS gives U.S. taxpayers a lot of leeway in choosing a company’s tax classification.

Under a set of default rules (absent an election), a non-US business entity is classified as an association/corporation under U.S. tax law if all of its members have limited liability. It’s classified as a partnership if it has two or more members and at least one member does not have limited liability. Finally, it’s disregarded for tax purposes if it has a single owner and that owner does not have limited liability with respect to the entity.

With the exception of certain companies, the IRS allows you to file an entity classification election (often referred to as a “check-the-box” election) on Form 8832 to override the default tax classification of your company and change to a status of your choosing.

A non-US entity that is required to file a U.S. tax return for the year of the election must attach a copy of the Form 8832 to its return. If the entity is not required to file, a copy of the Form 8832 generally must be attached to the return of an owner of the entity. Importantly, the failure to comply does not invalidate the election, but it may trigger penalties.

The Effective Date of a Form 8832 Check-the-Box Election

When filling out the Form 8832, the taxpayer is asked to choose an effective date of the election. The effective date cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. So, for example, in order for your company to make an election with an effective date of January 1, the form would need to be filed by March 15.

Choosing the effective date of your election is important for another reason. The IRS views your election in one of two ways, either as an “initial classification” by a new company, or a “change in current classification” by an already existing company. If your effective date is the same date as the incorporation of your company, then the election will be considered an initial classification election. Otherwise, it will be treated as a change of classification.

The reason this important is because of the following rule: Once an eligible entity makes an election to change its classification, it cannot change its classification by election again for a period of 5 years. This limitation does not apply to an initial classification election.

Can You Make a Late Form 8832 Election?

In regards to late elections, the IRS is relatively lenient. The instructions to the Form 8832 state that the IRS will accept a late election (even to make an initial classification election), if the following requirements are met:

1. The Form 8832 is the only obstacle in the way of changing classification;

2. The entity has not filed a tax return yet for the year of the election because the due date hasn’t passed yet, or the entity (or those affected by the election) has filed consistently with the election classification;

3. The entity has reasonable cause for the lateness of the election;

4. 375 days from the requested effective date of the check-the-box election have not yet passed.

Whether you send a current or late Form 8832, the IRS will send a notification letter stating whether the election has been accepted or not. It normally takes the IRS 60 days to send out the letter.

How We Can Help

For U.S. citizens living abroad, owning a foreign company can have important tax and reporting implications. That’s why it’s essential to structure your business with these implications in mind.

Our experts at Expat Tax Professionals have helped many business owners living abroad make smart decisions that help maximize the tax efficiency of their operations. This includes the utilization of the Form 8832 entity classification election, when necessary, to reduce the overall tax burden of overseas operations.

Yes, we prepare tax returns. But we do so much more for U.S. expats around the globe. Please feel free to contact us, and we will set up a consultation appointment at your convenience.

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