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socrateaser
socrateaser, Lawyer
Category: Tax
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My wife and I are equal and only partners in an S-Corp LLC

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My wife and I are equal and only partners in an S-Corp LLC in Maryland. We moved out of US before the end of last year to reside in our home country. The LLC has effective income in USA and I need to find out what type of entity we should file taxes as going forward (I am aware that S-corp is not an option as we are not residents of USA anymore). What type of entity should I select in Form 8832 "Type of Entity" to inform IRS about the new entity classification?
Hello,

An entity originally formed as a corporation cannot elect to be taxed as anything other than an S or C corporation. 26 C.F.R. §(NNN) NNN-NNNN3(a). Form 8832 cannot be used to elect any alternative tax treatment.

At the instant you no longer reside in the USA, your corporation's S status terminates by operation of law, and the corporation must file all future tax returns as a C corporation (Form 1120). IRC § 1362(d)(2). This includes the tax return for the year in which the S status terminates.

Hope this helps.
Customer: replied 3 years ago.

Thank you sir! The LLC was formed as a pass-through entity and the S-corp election was filed in 2011 which was allowed by IRS. Now, as per your expert advice, my LLC is going to be taxed as a C corp by law. In this situation, can the LLC still operate as an LLC or does it need to become an Inc. or some other form or organization? If it can keep operating as an LLC, how would I inform IRS about this change in structure if form 8832 is not filed? Is the filing of taxes as C-corp using form 1120 enough for IRS to implicitly assume that a change of structure has been made since the company was filing 1120S before?

Your original question appears different than I originally read it. Maybe it's just late at night and I'm not seeing straight, or maybe you were editing it when I was answering, and our posts crossed paths.

That said, if your original organization was created as an LLC, rather than as a C Corporation for which you applied an S election, then you can indeed use Form 8832 to elect an alternative to S Corporation status. 26 C.F.R. 7701-3(c)(1)(i). This means that you can ignore my original answer, because, despite its accuracy, it is irrelevant to your circumstances, as your organization was not originally formed as a C Corporation.

Concerning the entity type, you would choose either 6(b), if you and your wife are filing as married-separate, or 6(c), of you and your wife are filing as married-joint.

Sorry for the confusion. Hope this helps.
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Customer: replied 3 years ago.

I'm afraid this has become more confusing for me. I can wait for an answer until you are fresh in the morning. Please consider the following summary of facts:


1. LLC was originally incorporated as pass-through, then opted for S-Corp LLC for taxation in 2011 (form 8832 was filled and authorized by IRS for this).


 


2. The owners (my wife and I) were US residents until last year and left USA before the end of last year so the LLC cannot be taxed as S-corp as we are non US residents now.


 


Now, being non-resident LLC owners my questions are:


1. Can we still operate the company as an LLC?


 


2. If yes, how do we inform IRS that we are changing from an S Corp taxation LLC to C Corp taxation LLC? Is form 8832 the form we will need to send to IRS given the fact that we have already elected for an election to a corporation in last 60 months?


 


3. You are suggesting the following options on Form 8832-


6(b): A domestic eligible entity electing to be classified as a partnership.


6(c): A domestic eligible entity with a single owner electing to be disregarded as a separate entity


 


Both the above options are basically changing from a corporation to a partnership or disregarded as an entity. However, I'm trying to find an option to change from S-Corp LLC to C-Corp LLC. May be the solution is just to do nothing to inform the IRS and just file Form 1120 instead of 1120S from now onwards.


 


Please advise.

Good morning. you asked:

I'm afraid this has become more confusing for me. I can wait for an answer until you are fresh in the morning. Please consider the following summary of facts:


1. LLC was originally incorporated as pass-through, then opted for S-Corp LLC for taxation in 2011 (form 8832 was filled and authorized by IRS for this).


2. The owners (my wife and I) were US residents until last year and left USA before the end of last year so the LLC cannot be taxed as S-corp as we are non US residents now.


Now, being non-resident LLC owners my questions are:


1. Can we still operate the company as an LLC?


A: This is confusing. After reviewing the law and regulations, my first thought was that you have found a hole in the law, because it appears that if you are making a second election within 60 months, that you must obtain a private letter ruling to do so, but also that the IRC is forcing an election by automatically destroying your previous S election -- thus leaving you without any filing status at all.

 

However, as of this morning (and I believe that this result is probably just accidental -- I doubt that the IRS actually thought through this outcome), I think that you are now required to file as a C Corporation, until 60 months pass, or unless you receive an exemption via private letter ruling. Title 26 C.F.R. 7701-3(c)(v) provides, "Subject to §(NNN) NNN-NNNN3(c)(1)(iv), the deemed election to be classified as an association will apply as of the effective date of the S corporation election and will remain in effect until the entity makes a valid election, under §(NNN) NNN-NNNN3(c)(1)(i), to be classified as other than an association."

 

An "association" is defined as a corporation under §(NNN) NNN-NNNN2(b)(2). So, if you do nothing at all, you would file as a C Corporation using Form 1120. After 60 months, you can elect LLC status using Form 8832.


2. If yes, how do we inform IRS that we are changing from an S Corp taxation LLC to C Corp taxation LLC? Is form 8832 the form we will need to send to IRS given the fact that we have already elected for an election to a corporation in last 60 months?


A: See above.


3. You are suggesting the following options on Form 8832-


6(b): A domestic eligible entity electing to be classified as a partnership.


6(c): A domestic eligible entity with a single owner electing to be disregarded as a separate entity


Both the above options are basically changing from a corporation to a partnership or disregarded as an entity. However, I'm trying to find an option to change from S-Corp LLC to C-Corp LLC. May be the solution is just to do nothing to inform the IRS and just file Form 1120 instead of 1120S from now onwards.

 

A: Exactly correct.

 

Hope this helps.