IRS provides flexibility to elect an entity’s tax status. This is done in recognition of the fact that there are various business and operational differences from one entity to another and one size does not fit all. But there are boundaries within which tax status elections can be made and changed. The following listed entities have the ability to change their tax status to a C-Corporation, partnership, or sole proprietorship by filing form 8832 with IRS:
- Single-member LLCs
- Multi-member LLCs
- Certain foreign entities
For C-Corporation and LLCs to elect as an S-Corp, Form 2553 is required to be filed with the IRS.
However, Sole proprietorships cannot file for a change in tax status.
Form 8832 or 2553 is required to be filed only if change of filing status is desired. If no form is filed, then IRS assumes default tax status of the entity.
One can apply for a change in tax status only once in five years.
Once Form 8832 is filed, the transformation cannot take into effect more than 75 days before or for each subsequent tax year thereafter for which the election is sought. For Form 2553, the transformation cannot take into effect no more than two months and 15 days after the beginning or anytime during the preceding year of the tax year for which the election is sought.
It is a commonly asked question as to what tax status is right for my business. We suggest that you read this white paper along with Company Formation and Tax Structuring paper included in this website (www.shahcpaus.com/article) to also understand implication of the entity structure that you have for your business. One must understand their current and future business needs to determine the right tax structure and election. If you have further questions, feel free to contact Kislay Shah CPA at firstname.lastname@example.org or call 646-328-1326.