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Check-the-box in late 2019: the form, the math, and what TCJA changed

Form 8832 still travels by mail, the 60-month door still closes, and §199A has quietly rewritten who wants which box

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 7 sections
  1. The mechanics have not moved
  2. Post-TCJA: the corporate rate is suddenly competitive
  3. §199A has made the S-corp election more attractive, but only below the threshold
  4. The S-corp election is still a Form 2553, not a Form 8832
  5. The 60-month rule and the irrelevant one
  6. What actually changed between June 2017 and December 2019
  7. Sources

check-the-box election in late 2019 is the same one-page exercise it was two and a half years ago: Form 8832, a check mark, an effective date, a mailing envelope. What has changed is the math on the other side of the check mark. The Tax Cuts and Jobs Act cut the C-corp rate to a flat 21%, introduced a 20% deduction for qualified business income at §199A, and produced the first serious reshuffling of the default classification calculus since the regulations were finalized in 1996.

This is a year-end 2019 guide for a founder deciding whether the tax treatment of an existing LLC still makes sense, or whether it is time to file the form. The form has not changed. The reasons to file it have.

The mechanics have not moved

Treas. Reg. § 301.7701-3 still governs. An eligible entity, which for almost every domestic reader means an LLC, gets a default classification keyed to the number of members. A single-member domestic LLC is a disregarded entity by default. A multi-member domestic LLC is a partnership by default. Per se corporations, listed at § 301.7701-2(b), cannot check the box at all; that door was closed at formation by state-law choice.

Form 8832 is still two pages. You write in the entity name, the EIN, the address, and the classification you want (association taxable as a corporation, partnership, or disregarded entity). You say whether this is an initial classification or a change from a prior election. You pick an effective date that falls within the window the regulation allows, which is up to 75 days before the filing date and up to 12 months after, per § 301.7701-3(c)(1)(iii). An authorized person signs.

Two filing details to flag for 2019. First, Form 8832 is still paper-only. The IRS has not opened an e-file channel for it, and the Form 8832 instructions in circulation through December 2019 continue to list the two service-center addresses (Kansas City and Ogden) to which the paper form is mailed. Plan for mail time. Certified mail with return receipt is worth the few dollars: the IRS does not acknowledge receipt of 8832 separately, and in the rare case of a processing dispute your only evidence is the postmark. Second, you attach a copy of the 8832 to the entity's next federal income tax return for the year the election takes effect. Missing the attachment does not void the election, but it produces IRS correspondence you will have to answer.

The 2017 mechanics piece walked through the form field by field. If you are filing for the first time, start there. The rest of this article is about why the post-TCJA environment changes the decision for several categories of filer who, two years ago, would have left the default alone.

Post-TCJA: the corporate rate is suddenly competitive

Before TCJA, the top C-corp rate was 35% and the top individual rate was 39.6%. With state tax layered on, corporate taxation on retained earnings plus shareholder-level tax on distributions generally exceeded pass-through taxation for any business returning cash to its owners. The C-corp was the default for venture-backed companies because it is what institutional investors expect, not because the rate structure was friendly.

TCJA cut the federal C-corp rate to a flat 21% and the top individual rate to 37%, both effective for tax years beginning after December 31, 2017 (Pub. L. 115-97, §§ 11001, 13001). The 21% rate is not a bracket; it applies to the first dollar and the last dollar of C-corp taxable income. For an LLC currently taxed as a partnership and retaining most of its earnings for growth, the math now runs differently than it did under the old rate. Retained earnings taxed once at 21% leave more inside the company than pass-through income taxed at the owner's marginal rate, which for a moderately profitable operator-owned LLC is often 32% to 37% before state tax.

Two caveats keep the C-corp from being an obvious answer. The first is that distributions out of a C-corp are taxed a second time, at qualified-dividend rates (up to 23.8% including the 3.8% net investment income tax) for most individual shareholders. An operator-owned business that wants to pay its owner a salary and distribute the rest is taxing the distributed slice twice; the effective combined rate climbs back above the pass-through line. The second is that accumulated-earnings and personal-holding-company rules under §§ 531 and 541 discourage parking cash inside a C-corp indefinitely to avoid the second layer. An operating business reinvesting its profits is fine. A holding company with passive income is not.

The clearest post-TCJA candidate for a check-the-box election to corporate status is an LLC that (a) generates meaningful profit, (b) reinvests most of it, and (c) has owners whose other income pushes them into the top individual brackets. For that profile, the 21% rate on retained earnings is a real saving, and the §1202 exclusion on qualified small business stock becomes available, which it is not for a pass-through. The post-TCJA §1202 analysis walks that calculus in detail.

§199A has made the S-corp election more attractive, but only below the threshold

Section 199A is the other half of the 2017 rewrite. It gives owners of qualifying pass-through businesses a deduction of up to 20% of qualified business income, subject to a taxable-income threshold and a set of limits above the threshold. For 2019, Rev. Proc. 2018-57 § 3.27 sets the threshold at $160,700 for single filers and $321,400 for joint filers, measured on total taxable income before the §199A deduction itself. These are the numbers that draw the decision boundary for most operator-owned LLCs this year.

Below the threshold, the §199A deduction is close to automatic. A single-member LLC taxed as a disregarded entity with $100,000 of net profit gets a $20,000 deduction off taxable income, bringing the effective federal rate on that income down by roughly a quarter depending on bracket. A two-member LLC taxed as a partnership gets the same treatment, pro rata. The S-corp election layered on top adds its traditional benefit: the owner takes a reasonable salary as W-2 wages (subject to FICA) and the remainder as distributions not subject to self-employment tax, which below the §199A threshold still produces qualified business income eligible for the 20% deduction on the distribution portion. The payroll-tax savings run on the same economics they did pre-TCJA, and §199A does not meaningfully penalize the election below the threshold.

Above the threshold, the picture inverts in specific ways. §199A(b)(2) caps the deduction at the greater of 50% of W-2 wages paid by the business or 25% of wages plus 2.5% of the unadjusted basis of qualified property. For a service business with no W-2 wages and no property, the deduction phases out completely above $210,700 single or $421,400 joint. For a non-service business, running payroll becomes a prerequisite to preserving the deduction. The S-corp election suddenly has a second purpose: it creates W-2 wages where none previously existed. A two-member partnership LLC earning $500,000 of ordinary income paid entirely as guaranteed payments generates no W-2 wages, gets no §199A deduction on that income above the threshold, and would benefit from electing S status precisely to produce the wage base that supports the deduction.

The specified-service-trade-or-business (SSTB) carve-out at §199A(d)(2), as fleshed out by the final regulations (T.D. 9847, published Feb. 8, 2019), disqualifies health, law, accounting, consulting, financial services, and a listed set of other professions above the threshold. For an SSTB above $210,700 single or $421,400 joint, the §199A deduction is zero regardless of the classification election; the S-corp move is back to being pure payroll-tax arbitrage on the reasonable-compensation margin.

The 2018 recalibration piece walked the updated math at the introduction of §199A; the 2019 field report has the volume and error-rate data from the first full post-TCJA filing season. Both are worth reading before making the election.

The S-corp election is still a Form 2553, not a Form 8832

A point worth re-stating because it is the most common procedural error filers make. An LLC that wants to be taxed as an S-corporation files a single Form 2553; the IRS treats that filing as also making the corresponding § 301.7701-3(c)(1)(v)(C) election to be classified as a corporation for federal tax purposes. You do not need a separate Form 8832 and filing both can confuse the IRS into opening two files. Form 2553 has its own timing rule under § 1362(b)(1): for an election to take effect for a given tax year, it must be filed within two months and fifteen days after the start of that year. For a calendar-year entity, that is March 15.

Late 2553 and 8832 elections are governed by Rev. Proc. 2013-30, which remains in force and governs as of December 2019 with no superseding procedure. It allows automatic relief for late S-corp, electing small business trust, qualified subchapter S trust, and corporate classification elections filed within three years and seventy-five days after the intended effective date, provided the entity has reasonable cause, has been operating consistently with the intended election, and has filed all required returns consistently with the election. A statement explaining reasonable cause is attached to the late filing. No user fee. No private letter ruling. This is the single most useful IRS procedure for founders who discover in year two that the CPA assumed the S election was made and it was not.

The 60-month rule and the irrelevant one

§ 301.7701-3(c)(1)(iv) still bars a second classification election within sixty months of the effective date of an election to change classification. The IRS can waive it under the same regulation if more than 50% of the interests have changed hands since the prior election, but the ordinary case is five years of living with the box you checked. Two things about this rule are frequently misunderstood, and post-TCJA incentives make both more consequential.

First, an initial election by a newly formed entity choosing something other than its default is not a "change" for purposes of the 60-month rule. A two-member LLC formed in November 2019 that elects S status on its Form 2553 at formation has not used its sixty months; it can revoke the S election and go partnership, or file an 8832 to become a C-corp, without the five-year wait. An LLC that took the partnership default for its first year and then elects to be a C-corp in 2020 has used its sixty months: the 2020 election is a change.

Second, revoking an S election is procedurally different from changing an 8832 election. S-revocation is a statement signed by shareholders holding more than half the stock, filed with the IRS service center; it terminates the S status but leaves the entity a C-corp. A terminated S corporation cannot re-elect S status for five years without IRS consent under § 1362(g). These are parallel rules, not the same rule. If you elected S treatment at formation, revoked in year two to go C-corp, and now want S again, you are waiting until year seven unless the Commissioner consents.

What actually changed between June 2017 and December 2019

The regulatory text did not. § 301.7701-3 reads the same. Form 8832 is on the same template. The 60-month rule is intact. Rev. Proc. 2013-30 still governs late relief. E-filing for Form 8832 is still not available and there is no published IRS timeline for it.

What changed is the rate structure underneath the election. A C-corp classification at a 21% flat rate is a genuinely useful tool for a reinvesting operating business in a way it was not at 35%. An S-corp classification with §199A stacked on top is the best available treatment for a below-threshold operator-owned LLC in a non-service trade. Above the threshold, the S-corp is a way to manufacture W-2 wages that preserve an otherwise-lost §199A deduction, except for SSTBs, where the deduction is unavailable regardless. For single- member LLCs in service trades with taxable income comfortably above $210,700, the §199A deduction is gone and the classification choice reverts to the pre-TCJA payroll-tax question alone.

The other piece of environmental context worth naming: the 2017 article wrote that Form 8832 is usually filed in the spring because the 75-day look-back makes January 1 reachable from any filing date before mid-March. That is still true. Year-end is the wrong time to file an 8832 for a calendar-year entity that wants retroactive January 1 treatment for the year that is ending; by mid-December the current January 1 is already 350 days outside the look-back window. If you decide in December that you wanted to be a C-corp or S-corp for the year about to close, your options are Rev. Proc. 2013-30 late relief (if the facts support it) or accepting that the change takes effect for the new year starting in two weeks.

If the default still works for your business, leave it alone; if TCJA has pushed the math across a line, file the right form, pick an effective date the rules actually allow, and assume the next five years will be lived under the box.

Sources

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