As much as we all dread it, another tax season is just around the corner. The mere thought is enough to make any individual choke down two aspirins and crawl into a tight ball. For a new business owner, completing federal and state taxes can be frustrating and overwhelming to understand. However, if you are an unincorporated business entity such as a limited liability company (LLCs), partnership, or sole proprietorship, the IRS has tried to simplify your federal income tax filing process.
In January 1997, the IRS published regulations designed to streamline the way unincorporated business entities were classified. The new regulations came to be known as the âcheck-the-boxâ? regulations. Under these regulation, an LLC is permitted to elect whether it wishes to be taxed as a partnership or as a corporation. The process is as simple as filing the appropriate IRS form and “checking the boxâ? to indicate what kind of taxable entity you want to be. For the first time, the IRS was also allowing one-owner LLCs to escape corporate tax treatment, and for tax purposes, be treated as sole proprietors.
To qualify for this simplified filing process, an unincorporated business entities must satisfy three primary requirements. First, for federal tax purposes, the entity must be a separate entity. In most situations, the IRS will recognize the separate identity of an unincorporated entity as long as the owner does not control the day-to-day affairs of or otherwise deal with the entity in such a manner that the entity is a mere agent or instrument of its owner. Second, the entity must be a business entity. The regulations define a âbusiness entityâ? as a separate federal tax entity that is not classified as a trust or otherwise subject to special treatment under the Internal Revenue Code. Finally, the business entity must be an âeligible entityâ?. Simply put, it can not be categorized as a corporation.
If eligible, business entities using the âcheck-the-boxâ? regulation can enjoy the most beneficial tax structure allowed for their unincorporated business. Some business entities are also eligible for an added bonus. A main business entity can set up a series of subsidiary LLCS for the various divisions of their business, but which can be totally ignored for federal tax filing purposes. While the main business will still file one partnership or corporate tax return, it can combine the others under a separate “sole proprietorship” LLCs filing a single tax return. In the end, there are no multiple tax returns or complex consolidated corporate tax returns.
For more information on the âcheck-the-box regulationsâ? and how they impact your business, contact your financial advisor or tax account. To learn more about the different business structures, click here.