Business entities that are not classified as corporations can elect to be classified as a corporation or partnership, or be disregarded as an entity separate from its owner.[1] Failure to make an election results in one of three default classifications: (1) a partnership (for entities with 2 members, one of which does not have limited liability), (2) a corporation (for entities with members which all have limited liability), or (3) a disregarded entity (for entities with a single owner that does not have limited liability).[2] By filing Form 8832 (Entity Classification Election), an entity avoids default classification and will instead be treated pursuant to its election as of the date specific in Form 8832, or, if no date is specified, on the filing date.[3]
While Form 8832 election generally cannot take effect 75 days prior to, or 12 months after, the filing of the form, the IRS can grant a reasonable extension. To receive an extension, a requesting entity must show the IRS that (1) it acted reasonably and in good faith, and (2) the extension will not prejudice the interests of the government.[4]
IRS Private Letter Ruling 202012007 found that these requirements were met when a foreign LLC wholly owned by a domestic company inadvertently failed to timely file a Form 8832 election to be treated as a disregarded entity, thus allowing the requesting entity a 120 day extension to file Form 8832.[5] The foreign entity would be treated as a disregarded entity as of the date specified in its Form 8832 as long as the entity, its parent company, and the parent company’s owners all filed the requisite federal income tax returns and information returns within the extension period.[6]
The ruling discussed in this post followed a separate ruling discussed in an earlier post, IRS Private Letter Ruling Allows Foreign Corporation’s Untimely Form 5471 Election.
[1] 26 C.F.R. § 301.7701-3(a).
[2] Id. at § 301.7701-3(b).
[3] Id. at § 301.7701-3(c)(1).
[4] Id. at § 301.9100-3.
[5] I.R.S. Priv. Ltr. Rul. 202012007 (Mar. 20, 2020), 1, 3.
[6] Id. at 3.
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