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.

Contents

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 informational returns. [9]

See also

References

  1. ↑ "Single member limited liability companies | Internal Revenue Service". www.irs.gov. Retrieved 2025-11-05.
  2. ↑ "Choose a business structure | U.S. Small Business Administration". www.sba.gov. Retrieved 2025-11-05.
  3. ↑ "Operating a QSub". The Tax Adviser. 2012-08-01. Retrieved 2025-11-09.
  4. ↑ "Income Tax Implications of Grantor and Non-Grantor Trusts". www.claconnect.com. Retrieved 2025-11-09.
  5. ↑ admin (2021-04-15). "Disregarded Entities | What Are They | Pros & Cons in M&A". Leo Berwick. Retrieved 2025-11-05.
  6. ↑ Birmingham, Brad; Bandoblu, James (August 2009). "Disregarded Entities: To Be Or Not To Be?" (PDF). Business Entities.
  7. ↑ "The final "check the box" regulations". Journal of Accountancy. 1997-12-01. Retrieved 2025-11-05.
  8. ↑ "Understanding LLC law: Its past and its present". www.wolterskluwer.com. Retrieved 2025-11-05.
  9. ↑ Dallas, By Jason B. Freeman, CPA, J. D. (2017-04-01). "Foreign-owned domestic disregarded entities: Why new reporting requirements?". The Tax Adviser. Retrieved 2025-11-05.{{cite web}}: CS1 maint: multiple names: authors list (link)
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