Will Form 8865 Disregarded 2023-2024

In this short video, we will discuss the concept of a disregarded entity. In most countries, an entity is classified as a corporation, partnership, or trust based on its legal formalities. In the U.S., however, there are rules that allow a business entity, including an LLC, to choose whether it is treated as a corporation or a flow-through entity. These rules are called the check-the-rules. An LLC or any other business entity has the option to choose the check-the-rules, except for U.S. corporations and foreign corporations that could be publicly traded. These entities are automatically treated as corporations. For everyone else, the election is made on IRS form 8832. The IRS regulations state that if an entity has only one owner and is not treated as a corporation, it is disregarded as separate from its owner. This can be a confusing concept, as many people struggle to understand what "disregarded" means in this context. There are two forms of disregard. First, a business entity can make the check-the-rules election and, if it has one owner, it is disregarded. Second, a 100% subsidiary of an S corporation can elect to be a qualified chapter S subsidiary. In both cases, the entity is treated for U.S. tax purposes as if it does not exist. When an entity is disregarded, everything about it flows through to the owner for tax purposes. This goes beyond the concept of flow-through entities like partnerships, where only the results of the entity flow through. For disregarded entities, the transactions themselves flow through. For example, if I sell inventory to my disregarded entity subsidiary, the sale is ignored for U.S. income tax purposes. But for legal and UK tax purposes, the sale is considered to have happened. There are several implications of having a disregarded entity. For instance, if I loan money to my...