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Nicholas Fiore
Nicholas Fiore

A guide to the “check-the-box” rules

Knowing these rules can help you choose the right business entity for your clients.

July 31, 2014
by Nicholas Fiore, J.D.

While a few business entities are automatically classified as corporations, most can choose how they will be classified for federal tax purposes. A business entity is any entity recognized for federal tax purposes that is not properly classified as a trust under Regs. Sec. 301.7701-4 or otherwise subject to special treatment under the Code. Business entities that are not classified as a corporation under Regs. Sec. 301.7701-2 are “eligible” entities.

Eligible entities can make a classification election. An eligible entity with at least two members can choose to be classified as either (1) an association taxable as a corporation or (2) a partnership. An eligible entity with a single member can choose to be (1) classified as an association taxable as a corporation or (2) disregarded as an entity separate from its owner. If a joint undertaking is considered an entity separate from its owners for federal tax purposes and is an eligible entity, it may elect how it will be classified under these same rules.

Automatic classification as a corporation

Under Regs. Sec. 301.7701-2, the following business entities are automatically classified as corporations:

  • Organizations formed under a federal or state law (or under a statute of a federally recognized Indian tribe) that refers to the entity as incorporated or as a corporation, body corporate, or body politic;
  • Associations, as determined under Regs. Sec. 301.7701-3, including Sec. 501(a) exempt organizations;
  • Organizations formed under a state law that refers to them as joint-stock companies or joint-stock associations;
  • Insurance companies;
  • Certain state-chartered banks;
  • Organizations wholly owned by a state or local government or by foreign governments or entities described in Temp. Regs. Sec. 1.892-2T;
  • Organizations specifically required to be taxed as corporations under Code sections other than Sec. 7701(a)(3) (e.g., certain publicly traded partnerships);
  • Foreign organizations identified in Regs. Sec. 301.7701-2(b)(8) and business entities formed under the laws of U.S. territories and possessions;
  • Real estate investment trusts;
  • Entities created or organized under more than one jurisdiction (i.e., business entities with multiple charters), if the entity is treated as a corporation by any one of these jurisdictions; and
  • Other organizations electing to be classified as corporations by filing Form 8832, Entity Classification Election (Regs. Sec. 301.7701-3).

Entities with two (or more) members

As previously stated, an eligible entity with at least two members is treated as a partnership or as an association taxable as a corporation.

Single-member entities

As noted, an eligible entity with a single member can choose to be classified as either (1) an association taxable as a corporation or (2) disregarded as an entity separate from its owner.

Note: If the single owner of a business entity is a bank, the special rules applicable to banks under the Code (excluding Secs. 864(c), 882(c), and 884) continue to apply to the single owner, as if the wholly owned entity were a separate entity (Regs. Sec. 301.7701-2(c)(2)(ii)).

Disregarded entities

In general, a disregarded entity is an eligible entity treated as an entity not separate from its single owner. However, a disregarded entity is treated as separate from its owner for purposes of:

  • Federal tax liabilities of the entity for any tax period for which the entity was not disregarded;
  • Federal tax liabilities of any other entity for which the entity is liable; and
  • Refunds or credits of federal tax (Regs. Sec. 301.7701-2(c)(2)(iii)).

A disregarded entity is also separate from its owner for purposes of employment tax (Regs. Sec. 301.7701-2(c)(2)(iv)(A)) and many excise taxes (Regs. Sec. 301.7701-2(c)(2)(v)), but not for self-employment tax.

Classification of LLCs

A limited liability company (LLC) is an entity formed under state law. Unlike a partnership, none of the members of an LLC is personally liable for its debts. The LLC structure is not recognized under federal tax law; therefore, an LLC’s filing status is determined by the check-the-box rules.

If an LLC is not automatically considered a corporation, it is an eligible entity that may elect to be classified either as a partnership or a corporation. If the LLC has at least two members and does not file Form 8832, it is classified as a partnership. A single-member LLC (SMLLC) can be either a corporation or a single-member disregarded entity. To be treated as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be considered a disregarded entity and will be taxed as a sole proprietorship for income tax purposes.

Some types of businesses (such as banks and insurance companies) generally may not be LLCs. In addition, there are special rules for foreign LLCs.

Filing Form 8832

As previously noted, a business entity not classified as a corporation can elect its classification under Regs. Sec. 301.7701-3. An eligible entity with at least two members can elect to be classified either as an association (and thus as a corporation under Regs. Sec. 301.7701-2(b)(2)) or as a partnership, and an eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner. Regs. Sec. 301.7701-3(b) provides a default classification for an eligible entity that does not file an entity classification election. Thus, an election need only be made when an eligible entity chooses to be classified initially as other than its default classification or when an eligible entity chooses to change its classification.

Regs. Sec. 301.7701-3(c)(1)(i) generally provides that an eligible entity may elect to be classified other than as provided under Regs. Sec. 301.7701-3(b), or to change its classification, by filing Form 8832 with the appropriate IRS service center. An election will not be accepted unless all of the information required by the form and instructions (including the entity’s taxpayer identification number) is provided.

Regs. Sec. 301.7701-3(c)(1)(ii) provides that an eligible entity required to file a federal tax or information return for the tax year for which an election is made must attach a copy of its Form 8832 to its federal income tax or information return for that year. If the entity is not required to file a return for that year, a copy of its Form 8832 must be attached to the federal income tax or information return of any direct or indirect owner of the entity for the owner’s tax year that includes the date on which the election was effective.

An election on Form 8832 specifying an eligible entity’s classification cannot take effect more than 75 days before the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. If the effective date is not specified on the form, the election is effective on the date the form is filed (Regs. Sec. 301.7701-3(c)(1)(iii)).

An eligible entity may be eligible for late election relief under Rev. Proc. 2009-41. If Rev. Proc. 2009-41 does not apply, an entity may seek relief for a late entity election by requesting a letter ruling and paying a user fee (following Rev. Proc. 2014-1 or any successor revenue procedures).

Change in classification

If an eligible entity elects to change its classification, the entity cannot change its classification by election again during the 60 months succeeding the effective date of the election. However, the IRS may permit the entity to change its classification by election within the 60-month period, if more than 50% of the ownership interests in the entity as of the effective date of the subsequent election are owned by persons that did not own any interests in the entity on the filing date or on the effective date of the entity’s prior election. An election by a newly formed eligible entity that is effective on the date of formation is not considered a change for these purposes (Regs. Sec. 301.7701-3(c)(1)(iv)).

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Nicholas Fiore, J.D., is an attorney with more than 30 years of tax editing and writing experience, primarily with The Tax Adviser. He has worked on the Uniform CPA Examination, written and edited both tax and nontax continuing education courses, and has provided tax and business information for a variety of audiences.