The Internal Revenue Service has discussed the process and criteria for business entity classification elections for federal tax purposes in a recent private letter ruling (202317009).
The IRS stated that under section 301.7701-3(a) of the Internal Revenue Code (IRC), a business entity not classified as a corporation under IRC under sections 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) can elect its classification for federal tax purposes. An eligible entity with at least two members can choose to be classified as either an association or a partnership, while an entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner.
For foreign eligible entities, IRC section 301.7701-3(b)(2)(i) provides that, unless the entity elects otherwise, it is considered:
- a partnership, if:
- it has two or more members; and
- at least one member does not have limited liability;
- an association, if all members have limited liability; or
- disregarded as an entity separate from its owner, if it has a single owner without limited liability.
Under IRC section 301.7701-3(b)(2)(ii), a member of a foreign eligible entity is considered to have limited liability if they bear no personal liability for the debts or claims against the entity by reason of being a member.
According to the IRS, to elect a classification other than the default provided in IRC section 301.7701-3(b), an eligible entity must file Form 8832, Entity Classification Election, with the designated service center. Per section 301.7701-3(c)(1)(iii), the effective date specified on Form 8832 cannot be more than 75 days prior to the filing date and cannot be more than 12 months after the filing date.
In the present case, the foreign eligible entity was formed under the laws of a foreign country and intended to be classified as a corporation. However, the entity failed to timely file Form 8832. Upon review, the IRS concluded that the requirements of IRC section 301.9100-3 have been satisfied and granted the entity an extension of 120 days from the ruling's date to make an election to be treated as a corporation for federal tax purposes.