Under the check-the-box regulations, U.S. businesses which own foreign entities can effectively structure their foreign entities for U.S. tax purposes. For example, foreign corporations can elect for federal tax purposes to be treated as an association or a partnership (if the legal entity form is not on the Per Se entity listing), or if the business has a single owner it can elect to be a disregarded entity. The foreign entity makes the election by filing Form 8832, Entity Classification Election, with the IRS Service Center designated on the form within 75 calendar days from the desired effective date. If it is required to file a federal tax or information return for the tax year that the election is made, it must also attach a copy of the form to its tax return for the year that it wants to make the election.
In a Private Letter Ruling (PLR 202225003), the IRS granted a foreign eligible entity a 120-day extension to file Form 8832 (Entity Classification Election) to elect to be treated as a foreign disregarded entity. The election would be effective on the date specified by the entity on Form 8832. The IRS ruled that the entity acted reasonably and in good faith and granting relief would not prejudice the interest of the government. The ruling was contingent on the foreign entity and its owner filing, within 120 days from the date of the ruling, all required returns for all open years consistent with the requested relief.
In addition, late election relief is also available. To make a late election under the provisions of the revenue procedure, an eligible entity must file a completed Form 8832 with the applicable IRS Service Center 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 on time. To be eligible for the extended late election relief, the business must have failed to obtain its desired classification solely because it failed to timely file Form 8832 and either it 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 or it must have filed all its required federal returns (since the time of the intended election) consistent with the classification it intended to obtain. The IRS will notify the entity if it is granting the late election relief
Often, CPA firms gain the knowledge from their clients that check-the-box elections on foreign entities were missed. This new PLR provide planning opportunities related to the effective date. Please reach out to McGuire Sponsel’s Global Business Services team to discuss any fact pattern or to understand the rules in more detail.
If you have any questions about our team or any global business or compliance issue, do not hesitate to reach out.
Jason Rauhe, CPA is a Principal in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services including transfer pricing, and the firm’s compliance expertise.
Rauhe previously served as Director of International Tax at a Top 100 CPA Firm, where he was responsible for the firm’s international tax division and major industry alliance networks.