construction industry

Default Classification

An entity classification election is necessary only when an eligible entity chooses to be classified initially as other than its default classification or when an eligible entity chooses to change its classification.

Limited Liability Companies with only one member are treated as "Disregarded Entities" Schedule C (business), Schedule E (rental property) or Schedule F (farm) filers by default. Multiple member LLCs are treated as Partnerships (1065 filers) by default. And Corporations are treated as C Corps by default.

Electing a Different Classification

To be classified as something other than the default classification, an election must be made.

An LLC with a single member or multiple members may file Form 8832 to elect to be treated as a C Corporation or S Corporartion (also file Fm 2553). Once these elections are made, they will remain in effect even if the number of members change.

On the other hand, if the number of members in an LLC classified as a partnership is reduced to only one member, it becomes an entity disregarded as separate from its owner under Regulations section 301.7701-3(f)(2).

If a single-member LLC classified as a disregarded entity for income tax purposes acquires an additional member, it becomes a partnership under Regulations section 301.7701-3(f)(2). However, if the LLC has made an election to be classified as a corporation (discussed later) and that elective classification is in effect at the time of the change in membership, the default classification as a partnership will not apply.

RELIEF FOR LATE CLASSIFICATION ELECTIONS

Eligibility for relief - An entity is eligible for relief under Section 4.03 of this revenue procedure for a late classification election if the following requirements are met:

(1)(a) - the entity failed to obtain its requested classification as of the date of its formation or upon the entity’s classification becoming relevant within the meaning of § 301.7701-3(d) solely because Form 8832 was not filed timely under § 301.7701-3(c)(1)(iii); or

(b) - the entity failed to obtain its requested change in classification (subject to the limitations of § 301.7701-3(c)(1)(iv)) solely because Form 8832 was not filed timely under § 301.7701-3(c)(1)(iii); and

(2)(a) - the eligible entity seeking an extension of time to make an entity classification election has not filed a federal tax or information return for the first year in which the election was intended because the due date has not passed for that year’s federal tax or information return; or

(b) - the eligible entity seeking an extension of time to make an entity classification election timely filed all required federal tax returns and information returns consistent with its requested classification for all of the years the entity intended the requested election to be effective and no inconsistent tax or information returns have been filed by or with respect to the entity during any of the taxable years. For changes in an eligible entity’s classification election, consistent filing of returns includes filing returns consistent with the deemed treatment of elective changes under § 301.7701-3(g). Under this revenue procedure, if the eligible entity is not required to file a federal tax return or information return, each affected person, who is required to file a federal tax return or information return, must have timely filed all such returns consistent with the entity’s requested classification for all of the years the entity intended the requested election to be effective and no inconsistent tax or information returns have been filed during any of the taxable years. Solely for purposes of this section 4.01(2)(b), an entity and an affected person will be treated as having timely filed a required tax or information return if the return is filed within 6 months after its due date, excluding extensions. An indirect owner of an eligible entity (such as a partner in a partnership that holds an interest in the eligible entity) is not an affected person if an entity in which the indirect owner holds a direct or indirect interest would be required to attach a copy of the eligible entity’s Form 8832 to its federal tax or information return in the circumstances described in section 4.01(2)(b)(i) or (ii) . An affected person is either:

(i) - with respect to the effective date of the eligible entity’s classification election, a person who would have been required under § 301.7701-3(c)(1)(ii) to attach a copy of the Form 8832 for the eligible entity to its federal tax or information return for the taxable year of the person which includes that date; or

(ii) - with respect to any subsequent date after the entity’s requested effective date of the classification election, a person who would have been required under § 301.7701-3(c)(1)(ii) to attach a copy of the Form 8832 for the eligible entity to its federal tax or information return for the person’s taxable year that includes that subsequent date had the election first become effective on that subsequent date; and

(3) - the eligible entity has reasonable cause for its failure to timely make the entity classification election; and

(4) - 3 years and 75 days from the requested effective date of the eligible entity’s classification election have not passed.

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