Tax Elections Definition

What are tax elections?

Tax elections are selections regarding tax treatment. In other words, the taxpayer elects how they want the Internal Revenue Service (IRS) and state taxing agency to tax their income. Tax elections are available for businesses and individuals. Some tax election benefits are that they can defer and even reduce your tax liability. 

Tax Election Examples

To better understand the meaning of tax elections, it’s helpful to look at some examples. Certain business types can make tax elections. For example, What is a C corporation? can elect to be treated as S corporations (please see our What is an S Corp? page) for tax purposes. Limited liability companies (LLCs) also have flexibility when it comes to choosing their tax treatment, and this flexibility is often considered one of the tax elections advantages. 

Corporations

C corporations are subject to double taxation. This means that the corporation pays income tax at the corporate level on net earnings, and then shareholders also pay income tax on any dividends they receive from those earnings. This results in the same income being taxed twice. However, a C corporation can make a tax election to be treated as an S corporation, as long as the C corporation meets the IRS’s requirements. S corporations are subject to pass-through taxation. This means that all income passes through to the corporation’s owners, who then report the income on their personal tax returns and pay taxes at their individual tax rates. This can result in having more money left over to reinvest back into the company. 

Limited Liability Companies 

LLCs can be taxed in several different ways. This kind of flexibility is what makes LLCs so attractive to small business owners. By default, the IRS treats single-member LLCs as sole proprietorships and multi-member LLCs as partnerships. The tax treatment for both of these types of LLCs is pass-through taxation. 

An LLC can make an election to be taxed as either a C or an S corporation. Now, you might be wondering, Why would you want your LLC subject to double taxation? A business owner may not want the company’s income passing through to them because it could push them into a higher tax bracket — resulting in a larger tax bill for the owner. 

How do you make tax elections?

To change the tax treatment of your business, you need to file the right form with the IRS and make the election. For example, if you want to elect a different tax status for your LLC, you must file Form 8832. 

You may need to make the tax election at both the federal and state level. Be sure to check with your state’s Secretary of State, Department of Corporations, or Department of Revenue or tax for any filing requirements.  

Summary

The tax elections definition is quite simple: it’s an election for tax treatment purposes. Before making a tax election, it’s important to know how it will impact your business. Don’t hesitate to reach out to a financial professional to get a full and accurate picture of how certain elections will impact you and your company. 

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