A key tool for assisting business owners in determining the tax status of their entity is Form 8832. They can decide whether to tax their company as a corporation, partnership, or disregarded entity. Failure to submit this form could have ramifications that are bad for business.
If a business owner fails to submit Form 8832, the entity’s tax status will be established by default depending on the number of members in the company. The business will be viewed as a single entity if there is only one member, and as a partnership if there are numerous members. In any case, the company will pay more taxes than it would have if it had chosen to be taxed as an S-corporation.
An S-corporation is often the best option for small enterprises in terms of taxes. It enables the company to prevent double taxes, a problem that frequently affects enterprises. The shareholders of an S-corporation get the profits and losses, who subsequently declare them on their personal tax returns. In other words, the company itself doesn’t pay federal income taxes.
Compared to the taxes paid by an S-corporation, the self-employment taxes owed by a single-member LLC and a partnership may be much greater. As a result, if a business owner does not submit Form 8832, they forfeit the tax advantages that come with having an S-corporation.
Fortunately, by submitting Form 2553, a single-member LLC may elect S-corporation status. Within 75 days of the start of the tax year or 75 days after the business’s creation, this form must be submitted. It’s crucial to remember that not all companies qualify for S-corporation status. The company must adhere to a number of conditions, including issuing only one class of stock and having no more than 100 shareholders.
By submitting Form 8832 and choosing to be taxed as a disregarded entity, a business owner can convert their S-corporation into a single-member LLC. However, before making the adjustment, it’s crucial to take into account any possible tax repercussions.
In conclusion, a business may be forced to pay more taxes than necessary if Form 8832 is not filed. Business owners must be aware of their alternatives and make wise choices regarding their tax status. It can offer major tax advantages to elect to be taxed as an S-corporation, but it’s essential to make sure the company satisfies the prerequisites. If a business owner has to alter their tax status, they can do so by submitting the necessary paperwork while keeping in mind any possible tax repercussions.