Question

1. Under the “check-the-box” rules what is the default status of an LLC (single-member or multi-member)? If an entity is incorporated under state law, what are its options for purposes of entity taxation selection?

Answer 1

check-the-box rules

For decades, tax practitioners have expended significant time and energy worrying whether an entity would be treated as a corporation or partnership for income tax purposes. Now, IRS (Internal Revenue Service) has eliminated all those worrying by implementing "check-the-box" regulations, which will allow certain entities to choose how they want to be taxed.

Under this rule, business entities divided into three groups and options of entity taxation selection.

1) Those who are automatically classified as corporations

2) Those who need to elect to be classified as partnership or corporations

3) Those who need to be classified as a corporation or overlook for tax purposes.

The first group have certain entities that are not helped by the new rules. Rather, they are automatically classified as corporations. This group includes entities of Insurance corporations, banking entities, incorporated corporations, state-owned companies, publically traded partnerships and certain listed organization formed outside of U.S. In the second group includes entities may have elected as a partnership or corporation, which includes all other business entities with at least two members in the board. In the third group automatically classified as corporations with only a single owner would be treated as a corporation for federal tax purposes.

In summary, the new check-the-box rules are a transmission from the old complicated classification rules. Indeed, th new rules effectively change entity classification from one of the most complicated areas in the tax law to one of the simplest.