Check-the-Box Elections and Form 8832

Short answer: The check-the-box rules let many business entities, US and foreign, choose how the US taxes them: as a corporation, a partnership, or, with a single owner, as a disregarded entity that is ignored for income tax. The choice is made on Form 8832. Entities that never file one get a default classification. Funds use these elections constantly, to build blockers, to make foreign holding companies transparent, and to control how a sale is taxed. The catch is that a change of classification is treated as a real transaction, and the rules on timing are strict.

Why classification matters

How the US classifies an entity decides almost everything about its tax:

A corporation pays tax on its own income, and its owners are taxed again on dividends. It files Form 1120.
A partnership pays no income tax itself. Its income flows through to its partners on a Schedule K-1, and it files Form 1065.
A disregarded entity does not exist for income tax purposes at all. Its assets and income are treated as its owner's.

For a foreign entity, classification also decides which information return its US owners file: Form 5471 for a foreign corporation, Form 8865 for a foreign partnership, or Form 8858 for a foreign disregarded entity. It decides whether the entity can be a CFC or a PFIC as well.

Step 1: can the entity choose at all?

Only an eligible entity can elect. That is any business entity that is not automatically a corporation, often called a per se corporation. The main per se corporations are:

entities incorporated under a US federal, state or tribal statute;
state joint-stock companies, insurance companies and certain state-chartered banks;
entities wholly owned by a government; and
the foreign entity types named in the regulations, which are mostly each country's public company form.

The foreign list includes, for example, the UK and Irish public limited company, the German Aktiengesellschaft, the French and Luxembourg société anonyme, the Dutch naamloze vennootschap, the Polish spółka akcyjna, the Japanese kabushiki kaisha, the Korean chusik hoesa, the Chinese gufen youxian gongsi, and any Canadian corporation or company.

Everything else is eligible. That includes US LLCs and limited partnerships, and the private company forms funds use most abroad, such as a Luxembourg S.à r.l. or a Dutch B.V. A Cayman Islands company does not appear on the per se list either.

Step 2: the default classification

An eligible entity that files no election is classified by default:

	Two or more owners	One owner
US entity	Partnership	Disregarded entity
Foreign entity, all owners have limited liability	Corporation	Corporation
Foreign entity, at least one owner has unlimited liability	Partnership	Disregarded entity (if the single owner has unlimited liability)

So the two defaults point in opposite directions. A US LLC is transparent unless it elects otherwise. A foreign company whose owners all have limited liability, such as an S.à r.l. or a B.V., is a corporation unless it elects otherwise. Limited liability is judged under the law the entity is formed under: an owner lacks it if creditors can pursue that owner for the entity's debts just because of the ownership.

Foreign entities and "relevance". A foreign entity's classification only matters once it becomes relevant, meaning it affects anyone's US tax or information reporting, for example when a US person acquires an interest that requires a Form 5471. If a foreign entity's classification has never been relevant, its first classification is set by the default rules when it first becomes relevant.

Step 3: making the election

The form. File Form 8832 with the IRS service center in Kansas City or Ogden, depending on the entity's location. Foreign entities file in Ogden. An entity that elects S corporation status on Form 2553 is treated as electing to be a corporation, so it does not also need Form 8832.

Who signs. Either every owner at the time of filing, or an officer, manager or member who is authorised to make the election and says so under penalties of perjury.

The effective date window. The election can take effect no more than 75 days before the date it is filed, and no more than 12 months after. Miss the 75-day window and the earliest effective date moves forward, unless you qualify for late election relief.

Attach a copy. A copy of Form 8832 goes with the entity's federal return for the year of the election. If the entity files no return, the copy goes with the returns of its direct or indirect owners. A missing copy does not invalidate the election, but penalties can apply.

The 60-month rule. Once an entity changes its classification by election, it generally cannot change again for 60 months. The IRS can allow an earlier change by private letter ruling if more than 50% of the ownership has changed hands since the earlier election. A newly formed entity's election that takes effect on the day it is formed is not a "change", so it does not start the 60-month clock.

What happens when an entity changes classification

A change by election is not just a label. The regulations treat it as a set of deemed transactions, and those can trigger tax:

Change	What is deemed to happen
Partnership → corporation	The partnership contributes all its assets and liabilities to the corporation for stock, then liquidates by distributing the stock to its partners
Corporation → partnership	The corporation distributes all its assets and liabilities to its shareholders in liquidation, and they contribute them to a new partnership
Corporation → disregarded entity	The corporation distributes all its assets and liabilities to its single owner in liquidation
Disregarded entity → corporation	The owner contributes all the assets and liabilities to the corporation for stock

The change itself takes effect at the start of the day the election is effective, and the deemed transactions happen immediately before the close of the previous day. The ordinary rules for contributions and liquidations then apply. Turning a corporation into a partnership or disregarded entity is a deemed liquidation, which can bring out built-in gain and, for a foreign subsidiary, can pull its accumulated earnings into US tax. Run the numbers before you file.

If you missed the deadline

Rev. Proc. 2009-41 gives relief for a late election without a private letter ruling if all of these apply:

the entity failed to get the classification it wanted solely because Form 8832 was not filed on time;
it has either not yet filed a return for the year concerned, or it and its owners have filed consistently with the intended classification;
it has reasonable cause for filing late; and
no more than 3 years and 75 days have passed since the requested effective date.

The entity completes Part II of Form 8832, with a statement explaining why it filed late. If it does not qualify, the remaining route is a private letter ruling, with a user fee.

Limits of being disregarded

A disregarded entity is ignored for income tax, but not for everything. For employment taxes and certain excise taxes, it is treated as a corporation, so it has its own employer identification number and payroll obligations. State tax treatment can differ too.

How funds use check-the-box

Blockers. A fund that wants a corporate layer for its foreign or tax-exempt investors can use a US LLC that elects to be a corporation. The corporation absorbs ECI or UBTI that those investors would otherwise have to report themselves.
Transparent foreign holding companies. Many funds hold foreign deals through an S.à r.l. or B.V. By default it is a corporation. Electing to treat a single-owner vehicle as disregarded makes it transparent, so a Form 8858 replaces the Form 5471 and the CFC or PFIC analysis at that level falls away.
Foreign partnerships instead of foreign corporations. A multi-owner foreign vehicle can elect partnership status so US investors are taxed on its income directly, with a Form 8865, rather than holding shares in a possible CFC or PFIC.
Planning a sale. Because a change in classification is a deemed transaction, an election before an exit can change what is treated as sold for US purposes, for example turning a sale of shares into a sale of the underlying assets. That can change both the amount and the character of the gain.

Worked example

A US real estate fund forms a Luxembourg S.à r.l. on 1 March to buy an office building in Amsterdam. The fund is the only owner.

No election. Every owner of an S.à r.l. has limited liability, so by default it is a corporation. The fund owns a foreign corporation, files Form 5471 if the reporting rules apply, and has to work through the CFC and PFIC rules.
Election effective 1 March. The fund files Form 8832 electing disregarded status, effective on the formation date. It must file within 75 days, by 15 May. Because the election takes effect on the day the S.à r.l. is formed, it is an initial classification, not a change: there are no deemed transactions and no 60-month clock. The building's income is the fund's income, and the fund reports the S.à r.l. on Form 8858.
Filed in August instead. The earliest effective date is now 75 days before filing, so from 1 March until then the S.à r.l. was a corporation under the default rule. Making it disregarded now is a change, with a deemed liquidation, unless the fund qualifies for late election relief under Rev. Proc. 2009-41 and can make the election effective back to 1 March.

Checklist

Is the entity on the per se list? If so, it is a corporation, full stop.
What is its default classification, and is that what you want?
Will the election be an initial classification (no deemed transactions) or a change (deemed transactions and a 60-month lock)?
File Form 8832 within 75 days of the date you want it to take effect, and attach a copy to the return.
Missed it? Check the four Rev. Proc. 2009-41 conditions before the 3 years and 75 days run out.
Line up the reporting: Form 5471, Form 8865 or Form 8858.

This explainer is general information, not tax advice.

Check-the-Box Elections and Form 8832, Explained