Tax Alerts - April 2012
April 2012 PDF
April 2012 Articles
- Latest IRS Data Book Shows Jump in Higher-income/Small Business Audit Rates
- IRS Expands Fresh Start Initiative to Help Economically-distressed Taxpayers
- Contemporaneous Tax Records – Are You Keeping Up?
- How Do I - Amend a Return
- FAQ - What is a Disregarded Entity?
- April 2012 Tax Compliance Calendar
- Transfer of Winning Lottery Ticket to S Corp is Taxable Gift
- Unmarried Co-owners Must Apply Single Mortgage Interest Limit
- Individual Adjusted Gross Income Rebounds
- Change of Accounting Rules/Audit Instructions Issued on New Repair Rules
- 2012 Vehicle Depreciation Dollar Limits Increase
FAQ - What is a Disregarded Entity?
A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner. A single-member LLC ("SMLLC"), for example, is considered to be a disregarded entity. For federal and state tax purposes, the sole member of a SMLLC disregards the separate legal status of the SMLLC otherwise in force under state law.
As the result of being "disregarded," the SMLLC does not file a separate tax return. Rather, its income and loss is reported on the tax return filed by the single member:
- If the sole owner is an individual, the SMLLC's income and loss is reported on his or her Form 1040, U.S. Individual Income Tax Return. This method is similar to a sole proprietorship.
- If the owner is a corporation, the SMLLC's income or loss is reported on the corporation's Form 1120, U.S. Corporation Income Tax Return (or on Form 1120S in the case of an S Corporation. This treatment is similar to that applied to a corporate branch or division.
A SMLLC is not the only entity treated as a disregarded entity. Two corporate forms are also disregarded: a qualified subchapter S subsidiary and a qualified REIT subsidiary. However, SMLLCs are by far the most common disregarded entity currently in use.
For federal tax purposes, the SMLLC does not exist. All its assets and liabilities are treated as owned by the acquiring corporation.
Even though a disregarded entity's tax status is transparent for federal tax purposes, it is not transparent for state law purposes. For example, an owner of an SMLLC is not personally liable for the debts and obligations of the entity. However, since the entity is disregarded, the owner is generally treated as the employer of disregarded entity employees for employment tax purposes.
To ensure compliance with requirements imposed by the IRS, please note, any advice contained in this publication was not intended, or written, to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This publication is distributed with the understanding that the publisher and distributor are not providing legal, accounting or other professional advice and assume no liability whatsoever in conjunction with the information contained within this publication.