Magazine article The CPA Journal

IRS Issues Proposed Check-the-Box Regs

Magazine article The CPA Journal

IRS Issues Proposed Check-the-Box Regs

Article excerpt

On May 9, the IRS and Treasury Department released proposed regulations permitting domestic unincorporated entities to elect to be "associations taxable as corporations" (associations). If no election to be an association is made, the entity is classified as a partnership or nonentity (if owned by a single owner). Therefore, a solely-owned LLC with an individual owner is taxed as a proprietorship and one owned by an entity is treated as a branch or division. The effective date will be the date final regulations are issued. The hearing on the proposed regulations is August 20, so the final regulations will not be issued before sometime this fall.

The overall approach taken by the regulations is to describe the entities that are corporations-generally all entities called corporations formed under state or Federal law. Domestic, unincorporated entities are presumed not to be associations. So an LLC need not file an election to be treated as a partnership or proprietorship. An election will only be necessary if an eligible entity wishes to betaxed as a corporation.

The rule for foreign eligible entities is a little more complicated. The proposed regulation drafters wanted to provide a default for foreign entities that tries to match the owners' intent in forming the organization. The regulation uses unlimited liability as the litmus test. Therefore, if the foreign entity has one or more owners with unlimited liability, it will be presumed to be a partnership or a nonentity. If all owners have limited liability, it will be presumed to be an association. If the default classification is not the desired one, the entity may elect to be classified as the desired type of taxpayer.

Eligible entities formed before the regulations become effective and wishing to retain their current classification need take no action. …

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