Implementing The Tax System Classification Rules

1139 Words Dec 9th, 2015 5 Pages
On December 17, 1996, the Department of the Treasury (Treasury) finalized rules that were intended to simplify the tax entity classification rules. These rules have become known as the “check-the-box” regulations. Simply put, these regulations allow an eligible entity to “check a box” that indicates the desired tax treatment the entity wishes to have. These new regulations signify what was a much needed departure from the previous classification regulations, which were vague, ambiguous, and created many disputes between taxpayers and the Internal Revenue Service (IRS). This simplification of the entity classification rules would make it easier for such entities to gain their desired tax treatment, which allows those entities to focus …show more content…
An entity with only one member has an option to be taxed as a corporation or can choose to be disregarded as an entity separate from its owner. That entity cannot choose partnership classification because a partnership, by definition, has two or more partners. A disregarded entity is a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner. Therefore, the taxpayer is treated as a sole proprietorship and the individual must report all income and losses on their own tax return.

Foreign business organizations are categorized by default classifications and must elect to be taxed differently on Form 8832, same as domestic entities. A foreign business entity where all owners have limited liability will be treated as a corporation unless it chooses to be taxed as a partnership. A foreign business entity where one or more owners has unlimited liability will generally be taxed as a partnership unless it elects to be taxed as a corporation. “The foreign equivalent of an LLC (such as a German GmbH), where all members have limited liability, will be taxed as a corporation unless it elects to be taxed as a partnership. The term "limited liability" is not precisely defined by the regulations, and it may be uncertain whether the IRS would consider a given foreign law to provide for limited liability for all members of

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