Finance:Disregarded entity
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Under U.S. tax law, a disregarded entity is an entity which is ignored for the purposes of taxation. Common examples of disregarded entities include single-member LLCs, qualified subchapter S subsidiaries and grantor trusts.
Features
According to the IRS, single-member LLCs that do not elect to be taxed as a corporation are disregarded entities. If the owner is an individual, then the LLC's activities will be reflected on the owner's tax return. Single-member LLCs owned by a corporation or partnership have their activities reflected in the corporation's or partnership's tax return.[1] In this case, the use of a disregarded entity offers taxpayers the benefits of limited liability without the drawback of double taxation.[2]
In certain circumstances, corporations wholly owned by an S corporation (qualified subchapter S subsidiaries) are disregarded for tax purposes. Any taxable events within the subsidiary corporation will be reflected on the S corporation's tax return, and transactions between the subsidiary and the parent S corporation are ignored.[3]
Grantor trusts are also generally disregarded for tax purposes.[4]
Disregarded entities have significant advantages for mergers and acquisitions. Because of the "substance over form" judicial doctrine, exchanges of property between the corporate or individual owner of a disregarded entity are not taxable events.[5]
History
In 1954, Congress created the first type of disregarded entity, a grantor trust.[6]
In 1996, the Treasury Department created new, simplified "check-the-box" rules for LLCs, which meant that single-member LLCs were disregarded for tax purposes (absent any elections).[7] Previously, single-member LLCs were generally taxed as corporations under the Kintner test.[8]
In 2017, the Treasury Department issued new regulations that require disregarded entities owned by a foreign person to file the informational return Form 5472.[9]
See also
References
- ↑ "Single member limited liability companies | Internal Revenue Service" (in en). https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies.
- ↑ "Choose a business structure | U.S. Small Business Administration" (in en). https://www.sba.gov/business-guide/launch-your-business/choose-business-structure.
- ↑ "Operating a QSub" (in en-US). 2012-08-01. https://www.thetaxadviser.com/issues/2012/aug/casestudy-aug12/.
- ↑ "Income Tax Implications of Grantor and Non-Grantor Trusts" (in en). https://www.claconnect.com/en/resources/articles/income-tax-implications-of-grantor-and-nongrantor-trusts.
- ↑ admin (2021-04-15). "Disregarded Entities | What Are They | Pros & Cons in M&A" (in en-US). https://www.leoberwick.com/pros-and-cons-of-disregarded-entities-in-ma-and-beyond/.
- ↑ Birmingham, Brad; Bandoblu, James (August 2009). "Disregarded Entities: To Be Or Not To Be?". Business Entities. https://www.hodgsonruss.com/assets/htmldocuments/1_2_1/Articles/BAB_JMB_Business_Entities_07_09.pdf.
- ↑ "The final "check the box" regulations." (in en-US). 1997-12-01. https://www.journalofaccountancy.com/issues/1997/dec/smbus-dec-1997/.
- ↑ "Understanding LLC law: Its past and its present" (in en). https://www.wolterskluwer.com/en/expert-insights/understanding-llc-law-its-past-and-its-present.
- ↑ Dallas, By Jason B. Freeman, CPA, J. D. (2017-04-01). "Foreign-owned domestic disregarded entities: Why new reporting requirements?" (in en-US). https://www.thetaxadviser.com/issues/2017/apr/foreign-owned-domestic-disregarded-entities-new-reporting-requirements/.
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