Implementing The Tax System Classification Rules

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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…
These new rules replace the Kintner test, which will be analyzed later in this paper. To fully understand the effects that CTB rules have on entities tax rates, it is important to understand the complexities of Regulation 301.7703. Explanation of Regulation 301.7703-3 As previously mentioned, any business entity that is not required to be treated as a corporation may choose its own classification. An entity may choose to have all of the beneficial characteristics as a corporation, but to avoid double taxation, they may choose to be taxed as a partnership. An entity with two or more members can be classified either as a partnership or as an association, which is taxed as a corporation. 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
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