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Disregarded Entity

Definition:

A disregarded entity is an entity that is owned by only one person, and for which the single member has either made a valid election to treat the entity as disregarded for US tax purposes, or which is disregarded under the US default classification rules. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return (a “disregarded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation. Payments made to a U.S. entity disregarded to a non-U.S. owner are treated as made to the non-U.S. owner. Example:   A U.S. Limited Liability Company (LLC) treated as a disregarded entity under the default U.S. classification rules, opens an account with a U.S. bank.  The U.S. LLC has a single owner, who is a non-U.S. individual.  The non-U.S. individual owner will have to provide a Form W-8 with its own name and tapayer identifying number (TIN).  All payments made by the U.S. bank will be reported on Form 1042-S to the single non-U.S. individual owner and not the name of the disregarded entity itself. Cites: Disregarded Entity — Treas. Reg. s. 301.7701-3(c)(1)(i) See Definition

Activity/Implementation:

Prior to completing Form 8832, all foreign entities must apply for an Employer Identification Number (EIN) via this link here. Form 8832

 

Purpose:

An eligible entity uses Form 8832 to elect how it will be classified for federal tax purposes, as a corporation, a partnership, or an entity disregarded as separate from its owner. An eligible entity is classified for federal tax purposes under the default rules unless it files Form 8832 or Form 2553, Election by a Small Business Corporation

 

Eligible entity:

An eligible entity is a business entity that is not included in items 1, or 3 through 9, under the definition of Corporation on Page 4 of the form. Eligible entities include limited liability companies (LLCs) and partnerships. Generally, corporations are not eligible entities. However, the following types of corporations are treated as eligible entities: 1. An eligible entity that previously elected to be an association taxable as a corporation by filing Form 8832. An entity that elects to be classified as a corporation by filing Form 8832 can make another election to change its classification. 2. A foreign eligible entity that became an association taxable as a corporation under the foreign default rule

 

When To File:

Generally, an election specifying an eligible entity’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. An eligible entity may be eligible for late election relief in certain circumstances.

 

Where To File:

File Form 8832 with the Internal Revenue Service Center for your state listed later. In addition, attach a copy of Form 8832 to the entity’s federal tax or information return for the tax year of the election. If the entity is not required to file a return for that year, a copy of its Form 8832 must be attached to the federal tax returns of all direct or indirect owners of the entity for the tax year of the owner that includes the date on which the election took effect. An indirect owner of the electing entity does not have to attach a copy of the Form 8832 to its tax return if an entity in which it has an interest is already filing a copy of the Form 8832 with its return. Failure to attach a copy of Form 8832 will not invalidate an otherwise valid election, but penalties may be assessed against persons who are required to, but do not, attach Form 8832. Each member of the entity is required to file the member’s return consistent with the entity election. Penalties apply to returns filed inconsistent with the entity’s election.

 

File this form if the eligible entity is one of the following:

  • A domestic entity electing to be classified as an association taxable as a corporation.
  • A domestic entity electing to change its current classification (even if it is currently classified under the default rule) (Default Rules are listed on Page 4 of the form).
  • A foreign entity that has more than one owner, all owners having limited liability, electing to be classified as a partnership.
  • A foreign entity that has at least one owner that does not have limited liability, electing to be classified as an association taxable as a corporation.
  • A foreign entity with a single owner having limited liability, electing to be an entity disregarded as an entity separate from its owner.
  • A foreign entity electing to change its current classification (even if it is currently classified under the default rule) (Default Rules are listed on Page 4 of the form).

 

Do not file this form if the eligible entity is: 

  • Tax-exempt under section 501(a); • A real estate investment trust (REIT), as defined in section 856; or
  • Electing to be classified as an S corporation. An eligible entity that timely files Form 2553 to elect classification as an S corporation and meets all other requirements to qualify as an S corporation is deemed to have made an election under Regulations section 301.7701-3(c)(v) to be classified as an association taxable as a corporation. All three of these entities are deemed to have made an election to be classified as an association.

 

Acceptance or Nonacceptance of Election 

The service center will notify the eligible entity at the address listed on Form 8832 if its election is accepted or not accepted. The entity should generally receive a determination on its election within 60 days after it has filed Form 8832.

See also: Identifying the Payee