What is a disregarded entity for tax purposes?
Quick Answer
A disregarded entity is a business entity that is undivided from its owner with regards to tax filing procedures. As of 2014, this classification therefore allows the owner to disclose business-related income and expenses on his or her personal income tax return.
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The Internal Revenue Service classifies single-member Limited Liability Companies as disregarded entities and therefore treats the entity as a sole proprietorship with regards to income tax obligations. The IRS defines the company as independent from the owner, which allows the owner to report the entity’s income and expenses on his or her Schedule C form.
The only business formation that can be classified as a disregarded entity is a single-member Limited Liability Company. A single-member LLC is separate from its owner; however, it can elect to be “disregarded” as separate for federal income tax purposes. Owners of a single-member LLC can opt for disregarded status to save money through filing on Schedule C or to protect their personal assets from lawsuits or a business bankruptcy filing.
If the LLC has employees, the IRS defines the entity as independent with regards to the employment tax and specific excise taxes. Single-member LLC’s are not required to formally elect their disregarded status. The IRS honors disregarded status as soon as the owner files their LLC’s taxes on Schedule C. If the owner wishes to forego their disregarded status, he may file Form 8832 to be regarded as an association and formally taxed as a corporation.
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