Disregarded entity

Under U.S. tax law, a disregarded entity is an entity which is ignored for the purposes of taxation. Common examples of disregarded entities include single-member LLCs, qualified subchapter S subsidiaries and grantor trusts.

According to the IRS, single-member LLCs that do not elect to be taxed as a corporation are disregarded entities. If the owner is an individual, then the LLC's activities will be reflected on the owner's tax return. Single-member LLCs owned by a corporation or partnership have their activities reflected in the corporation's or partnership's tax return.¹ In this case, the use of a disregarded entity offers taxpayers the benefits of limited liability without the drawback of double taxation.²

In certain circumstances, corporations wholly owned by an S corporation (qualified subchapter S subsidiaries) are disregarded for tax purposes. Any taxable events within the subsidiary corporation will be reflected on the S corporation's tax return, and transactions between the subsidiary and the parent S corporation are ignored.³

Grantor trusts are also generally disregarded for tax purposes.⁴

Disregarded entities have significant advantages for mergers and acquisitions. Because of the "substance over form" judicial doctrine, exchanges of property between the corporate or individual owner of a disregarded entity are not taxable events.⁵

In 1954, Congress created the first type of disregarded entity, a grantor trust.⁶

In 1996, the Treasury Department created new, simplified "check-the-box" rules for LLCs, which meant that single-member LLCs were disregarded for tax purposes (absent any elections).⁷ Previously, single-member LLCs were generally taxed as corporations under the Kintner test.⁸

In 2017, the Treasury Department issued new regulations that require disregarded entities owned by a foreign person to file the informational return Form 5472.⁹