What You Need to Know About Entity Classification Election

Business entities may elect to be treated as corporations taxed at the entity and member levels or as "flow through" entities taxed only at the member level. However, entities organized as corporations under U.S. state laws and certain foreign entities are treated as corporations, with no optional election.

Corporate tax is imposed in the United States at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Federal tax rates on corporate taxable income vary from 15% to 39%. State and local taxes and rules vary by jurisdiction, though many are based on federal concepts and definitions. Taxable income may differ from book income both as to timing of income and tax deductions and as to what is taxable.

There is an entity in charge of regulating the inflow of resources through tax collection in the country: The Internal Revenue Service. The Internal Revenue Service is the revenue service of the United States federal government. Is important to know that the government agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue.

The Internal Revenue Service s responsible for collecting taxes and the administration of the Internal Revenue Code. It has also overseen various benefit programs, and enforces portions of the Affordable Care Act.

Is also important to remember that some entities treated as corporations may make other elections that enable corporate income to be taxed only at the shareholder level, and not at the corporate level. Such entities are treated similarly to partnerships. The income of the entity is not taxed at the corporate level, and the members must pay tax on their share of the entity's income.

An entity which is eligible to make an election is referred to as an eligible entity. Generally, a corporation organized under the United States federal or state statute, and referred to as a corporation, body corporate or body politic by that statute, is not an eligible entity.

Reform business entity classification rules for foreign entities: Under the proposal, a foreign eligible entity may be treated as a disregarded entity only if the single owner of the foreign eligible entity is created or organized in, or under the law of, the foreign country in, or under the law of, which the foreign eligible entity is created or organized.

Therefore, a foreign eligible entity with a single owner that is organized or created in a country other than that of its single owner would be treated as a corporation for federal tax purposes. Except in cases of the United States of America tax avoidance, the proposal would generally not apply to a first-tier foreign eligible entity wholly owned by a United States person. The tax treatment of the conversion to a corporation of a foreign eligible entity treated as a disregarded entity would be consistent with current Treasury regulations and relevant tax principles.

For the record, a business entity is an entity that is formed and administered as per commercial law in order to engage in business activities, charitable work, or other activities allowable. Most often, business entities are formed to sell a product or a service. There are many types of business entities defined in the legal systems of various countries. These include corporations, cooperatives, partnerships, sole traders, limited liability company and other specifically permitted and labelled types of entities.

The following types of business entity are treated as eligible entities:

●     An eligible entity that previously elected to be an association taxable as a corporation.

●     A foreign eligible entity that became an association taxable as a corporation under the foreign default rule.

●     A foreign corporation that is not identified as a corporation under Treasury regulations.

A quick glance at history

Long before 1996 entities both domestic and foreign were classified as corporations or not based on the called "multi-factor test", which looked at limited liability; continuity of life; free transferability of interests; centralized management; associates; objective to carry on business for joint profit.

The initial regulations also included a list of foreign entities which would always be classified as corporations and which could not elect to be disregarded.

The first federal income tax was enacted in 1861 and expired in 1872, amid constitutional challenges. A corporate income tax was enacted in 1894, but a key aspect of it was shortly held unconstitutional. In 1909, Congress enacted an excise tax on corporations based on income. After ratification of the Sixteenth amendment to the United States of America Constitution, this became the corporate provisions of the federal income tax. Amendments to various provisions affecting corporations have been in most or all revenue acts since. Corporate tax provisions are incorporated in Title 26 of the United States Code, known as the Internal Revenue Code. The present rate of tax on corporate income was adopted in the Tax Reform Act of 1986.

Take a look to this article to learn how to reduce your personal and business taxes.