60-Month Rule for Check-the-Box Elections

In a prior NC Bar blog post, Classification of LLCs Under the Check-the-Box Regulations, I discussed the flexibility of LLC tax treatment due to the check-the-box regulations in Reg. § 301.7701-1, et. seq. The regulations allow LLCs, depending on the facts, to be disregarded for income tax purposes or taxed as partnerships, C corporations or S corporations. An LLC files Form 8832 to elect the desired tax status. In the case of an LLC electing to be an S corporation, Form 2553 constitutes an election to be classified as a corporation. Reg. § 301.7701-3(c)(1)(v)(C). 

If an entity makes an election to change its classification, “the entity cannot change its classification by election again during the sixty months succeeding the effective date of the election.” Reg. § 301.7701-3(c)(1)(iv). Thus, an LLC cannot simply change its tax election every year. The limit, however, does not apply to the first change from an LLC’s initial tax election, made as of the formation of the LLC. Accordingly, if an LLC elects as of formation to be taxed as a partnership, it is allowed to elect within the 60-month period to change its election to, for example, a C corporation. If, however, within 60 months of that election, it wishes to change back to a partnership, the subsequent election is prohibited by the 60-month rule. 

Reg. § 301.7701-3(c)(1)(iv) provides a potential exception: “The Commissioner may permit the entity to change its classification by election within the sixty months if more than fifty percent of the ownership interests in the entity as of the effective date of the subsequent election are owned by persons that did not own any interests in the entity on the filing date or on the effective date of the entity’s prior election.” Thus, relief from the 60-month rule may be available if there are significant changes in ownership.

John G. Hodnette is a partner with Fox Rothschild, LLP in Charlotte.