Disregarded entities' liability for excise and employment taxes.

• Author: Laffie, Lesli S.

Qualified subchapter S subsidiaries (QSubs) and certain other single-owner disregarded entities would be responsible for paying employment and excise taxes under new IRS guidance. According to the Service, the proposed rules (REG-114371-05,10/17/05) would treat those disregarded entities as separate, "regarded" entities for purposes of paying and reporting Federal employment and excise taxes, a shift from the existing system. The rules would apply to QSubs and single-owner eligible entities disregarded for Federal tax purposes under Sec. 7701.

Big change: The proposed roles are a significant change from the current structure. Under existing rules, either the disregarded entity or its owner can calculate and pay these taxes, but the ultimate responsibility for them remains with the entity's owner. By contrast, the new guidance would shift employment and excise tax responsibility entirely to the affected disregarded entities. Disregarded status would be eliminated for these entities for this limited purpose, although it would continue for other Federal tax purposes.

The change means entity owners would no longer be responsible for excise and employment taxes at all.

Easing compliance: The IRS proposed this change because the existing system, allowing payment and calculation of tax by either the entity or its owner, has caused significant difficulties for both taxpayers and the government.

According to the regulations' preamble, "[t]he Treasury Department and the IRS believe that treating the disregarded...