How and when to make a check-the-box election?
What is a check-the-box election?
An eligible entity can elect for optimal classification for US federal tax purposes (i.e., as a corporation, a partnership or a disregarded entity separate from its owner).
If the current default classification is not desired due to adverse US tax consequences, then the election allows you to change the classification for US tax and FATCA purposes.
Check-the-box elections have become a common planning tool to remedy the punitive GILTI, Subpart-F and PFIC tax regimes. They are also commonly used in the world of private equity to ensure that US investors and fund managers avoid double taxation.
For more information, please read our previous article on check-the-box elections.
How to make an election
There are two steps involved in making a check-the-box election.
Obtaining an employer identification number (EIN):
An EIN is a nine-digit number assigned by the Internal Revenue Service (IRS) to sole traders, corporations, partnerships, trusts, estates, and other entities for various tax filing and reporting purposes. The EIN becomes the tax identification number for the entity only.
A check-the-box election will not be accepted or processed by the IRS if the eligible entity does not provide a valid EIN.
Entities can apply for an EIN using the IRS Form SS-4, Application for Employer Identification Number (EIN).
Once issued, the IRS will send a formal notice to the address on record summarising the issuance of the identification number.
Making the election:
Once an EIN has been obtained, an eligible entity uses Form 8832, Entity Classification Election, to elect how it will be classified for US federal tax purposes.
The Form 8832 will include the effective date for the election – usually the date of incorporation if timely filed.
Form 8832 must be signed by relevant owners, any officer, manager, or member of the electing entity who is authorised as a ‘responsible party’. Where signed by owners, all who are owners at the time of the election must sign.
The IRS identify a ‘responsible party’ as follows:
‘The responsible party must be an individual not an entity. The ’responsible party’ is the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. The person identified as the responsible party should have a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the person, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets.’
Once complete, the Form 8832 must be mailed to the IRS as it cannot be electronically filed. The IRS will then issue a letter of acceptance generally within 60 days of filing Form 8832.
Timing is everything
The initial election must be made within 75 days of the desired effective date for the election.
Should an entity fail to obtain its desired classification or fail to obtain its requested change in classification within the 75-day window, then late election relief may be available under the IRS Revenue Procedure 2009-41, if there is reasonable cause for the delay.
To make a late election under the provisions of the revenue procedure, an eligible entity must file a completed Form 8832 within three years and 75 days of the effective date of the election, along with a statement explaining the reason for its failure to make the election in a timely manner. The eligible entity must have been filing consistently with the desired election for the three years and 75-day period.
If three years and 75 days has surpassed, an entity that has not previously made any election may still be able to change its default classification. This will require planning as it could create a deemed liquidation for US tax purposes – resulting in a large US tax liability for which there is no foreign tax credits available.
Once an entity has made an election, this cannot be reversed for a period of five years (60 months).
Would you like to know more?
If you have any questions about the above, please get in touch with your usual Blick Rothenberg contact or Terence Sivakumar using the details on this page.
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