Form 8832 Check-the-Box Entity Elections Under Section 7701: Selecting Entities for Foreign Operations

Description

Tax advisers are still digesting the impact of the 2017 tax legislation on businesses with offshore operations, particularly closely held enterprises. Numerous provisions in the Act make it necessary for tax advisers to determine which entity structure provides the best after-tax result for U.S. owners. Because the Internal Revenue Code, not the business situs country’s laws, govern the tax classification and treatment of a U.S. taxpayer’s foreign business holdings, tax advisers to small businesses engaged in cross border activities should evaluate whether their entity structure is optimal from a U.S. tax standpoint.

Section 7701 provides default classification rules for eligible entities but allows the entity to determine how it is classified for U.S. tax purposes. A foreign entity subject to U.S. tax must make its initial election when it becomes "relevant," i.e. when it impacts the U.S. tax liability of any person for either payment or informational return purposes. Taxpayers elect the tax treatment of their foreign business by completing Form 8832, Entity Classification Election, under the check-the-box provisions of Section 7701.

The general rule requires a taxpayer to wait five years after making an entity selection before changing the tax treatment of the foreign entity. However, Treas. Reg. 301.7701-3 allows specific exceptions to the 60-month rule for entity selection. Tax advisers must know the practical aspects of the check-the-box rules to ensure both flexibility and tax efficiency for U.S. taxpayers engaging in foreign business.

Listen as our expert panel provides thorough and practical guidance on the check-the-box regulations of Section 7701 and completing the entity classification election on Form 8832.