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Disregarded Entities And All That Comes With Them

What is A Disregarded Entity?

Are you working at home or simply running a small business? You should look into the classifications of a disregarded entity is an entity that is separate from the business owner but does not stand as separate to the IRS. The entity is also transparent. This means that all trade or business activities can be reported on the individual’s tax return. For example, an entity that can fit into this category is a small limited liability corporation. This is not one of the most common forms of business identification. There are lots of conditions that should be carefully analyzed when making tax-related decisions pertaining to taxable income and business transactions.

Do Disregarded Entities Have To Report Everything For Taxes?

A disregarded entity should report all trade or business activities to the IRS. A disregarded entity’s revenue over expenses should be analyzed thoroughly so that they can decide where the line is drawn between their transactions being business related or just hobbies. When income pertaining to the reported activities should exceed $600, it should be reported. If a transaction is analyzed and does not meet business classification standards, it is then recognized as a hobby that holds little to no obligations.

Are Disregarded Entities Self-Employed?

Disregarded entities are indeed considered self-employed. Their owners are considered employed by the entity. All monies acquired from any clear distinguishable employer should be reported with proof from a W2 IRS tax form.

What Do I Have To Do To Become a Disregarded Entity?

In order for an entity to be classified as a disregarded entity, one would simply need to include expenses and income on the same tax return as the individual. This would establish the coexistence of the individual and the entity to the IRS on the tax return, but the entity would still be seen as separate.

Does My Disregarded Entity Need To Be Recognized By The Federal Government?

The entity is classified as a disregarded entity because it is a separate business but still is recognized with the individual with the IRS. The entity needs to be recognized by the state but not by the federal government.

Should I File Schedule C?

Yes, this step is critical in successfully completing a tax return while including a disregarded entity. One must report the business’s activities through this form. This information is required so that the IRS can have insight into the entity’s net income.

What Are The Pros and Cons Associated With Being A Disregarded Entity?

Filing as a disregarded entity can add extra steps to the tax filing process that requires additional insight and analysis. There are indeed advantages to filing an entity under this classification.

  • The liability for debts is limited
  • The liability for lawsuits is limited
  • Has a transparent tax status to the federal government
  • Taxes are easy to file
  • Double taxation will not be enforced like most corporations have to undergo

As you can see, the benefits of being a disregarded entity can be rewarding. This allows revenues to be kept with the business and fewer complications are encountered. There are also negative aspects that can come into effect when filing as a disregarded entity.

  • The IRS may require more information
  • When inaccurate information is given, your assets are endangered
  • Self-employment taxes can be higher
  • Fees are required to be paid to the state
  • Investor are less likely to get involved with disregarded entities

Getting The Help Of A Professional Can Help Make Things Easier

As you can see, filing as a disregarded entity involves multiple considerations that must be done correctly in order to avoid future loss from the Internal Revenue Service. Keeping this information in mind while making transactions and keeping documentation is highly recommended when planning to use this type of filing status. Hiring a professional to help or handle all related filings may be the best choice for you and your business. For further questions, please contact the Internal Revenue Service to gain further insight about information pertaining to disregarded entities.

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