Check-the-box: choosing an entity's tax classification.

Author:Hollingsworth, Tracy
Position:Brief Article

The Internal Revenue Service has finalized rules that allow most businesses to choose whether they will be treated as a corporation or as a passthrough entity such as a partnership. Check-the-box rules also allow businesses to disregard their entity status for federal income tax purposes. For example, under the default classification system, a domestic single-owner entity is taxed as a sole proprietorship if the owner is an individual or as a division if the owner is a corporation, unless the entity elects to be taxed as a corporation.

The single-owner entity would not have to file a separate tax return; rather, it would simply report taxable income on Schedule C, Profit and Loss From Business, as a part of the owner's form 1040.

For some time now, companies have made use of so-called hybrid entities, such as limited liability companies, to take advantage of certain domestic and international tax breaks. These hybrid entities have both corporate and noncorporate characteristics--they can enjoy the liability protections of corporations but are not necessarily taxed as corporations. Under the check-the-box rules, businesses can avoid having to carefully structure hybrid entities to realize these benefits.

Observation: The final check-the-box rules have important implications for the taxation of domestic and...

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