The Income Tax Benefits of “Disregarded Entities”
June 30, 2017
What is a disregarded entity?
A disregarded entity (“DRE”) is a legal entity, such as a corporation, that is largely “disregarded” for the purposes of calculating income tax. Instead of tax liabilities being determined at the corporate level, the business is reported directly on the individual owner’s income tax return as if it were a sole proprietorship.
For the purpose of federal income taxes, the business activities of a DRE are treated as being the activities of its owner. However, such an entity may still be required to pay other kinds of taxes. For example, if a DRE corporation owned property, it would be still be required to pay any property taxes owing.
A DRE may, however, elect to be treated as a corporation by filing the appropriate forms with the IRS.
Tax benefits of using a disregarded entity
Through the DRE designation, a business can form an LLC to limit liability, while maintaining the tax benefits of a sole proprietorship. Thus, the business is treated like a corporation in every context other than income tax.
DREs are not required to meet corporate tax filing obligations, and do not need to obtain an employer identification number. Any transactions by the DRE are treated as being made by its owner.
Until recently, DREs were also exempt from the filing and reporting requirements of foreign owned corporations. They were not required to keep records of related party transactions, nor file corporate tax returns. This made DREs a very attractive option for owners outside of the United States.
Toronto lawyers advising on the use of disregarded entities in US tax planning
Recent changes to the use of DREs by foreign entities could have significant impact on tax planning for any foreigner using a domestic DRE. In our next post, we will review these changes and their implications.
The skillful cross-border lawyers and accountants at Feigenbaum Tax Law can offer expert advice about personal and corporate US federal and state income tax planning. We offer customized services to meet your needs.
If you have questions about DREs, contact us online, or call our office toll free at (877) 275-4792 to make an appointment.
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