Magazine article The CPA Journal

"Check-the-Box" Regulations

Magazine article The CPA Journal

"Check-the-Box" Regulations

Article excerpt

A business' classification for Federal tax purposes as a partnership or a corporation has depended on more than how the entity is legally estabfished. An organization that had more corporate characteristics-continuity of life, centralization of management, limited liability, and free transferability of interests-than partnership characteristics was treated as a corporation for tax purposes, even if it was established as a partnership under state law. Because partnerships and other unincorporated organizations have some corporate characteristics, taxpayers were spending a lot of time and money determining whether their businesses were partnerships or corporations for tax purposes. New regulations should make it easier for business to adopt a classification for Federal tax purposes.

The IRS has finalized new entity classif cation rules which were effective January 1, 1997. The rules generally permit an unincorporated entity to choose to be taxed as a partnership or a corporation by simply checking a box on a form. The new regulations, commonly called "checkthe-box," simplify the entity classification process and provide some flexibility in forming entities.

Eligible Entities

Eligible entities may elect the classification that best suits their owners' needs. To be eligible to make an election, a business entity must have at least two or more members that carry on a business and divide the profits from the business. Trusts are not eligible to elect entity clas sification as a partnership or a corporation and must be classified as trusts for

Federal tax purposes. Entities incorporated under state or Federal law or required to be classified as a corporation are also not eligible to check the box. A corporation must be taxed as a corporation and cannot elect partnership treatment.

Entities that are not automatically classified as corporations have a choice. …

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