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Excise and Employment Tax Treatment of Disregarded Entities Clarified

By Alistair M. Nevius, J.D.

Please note: This item is from our archives and was published in 2012. It is provided for historical reference. The content may be out of date and links may no longer function.

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The IRS issued final regulations (T.D. 9553) clarifying the treatment of disregarded entities with respect to employment and certain excise taxes. The rules adopt proposed regulations issued in 2009 (REG-116614-08).

Under Regs. Sec. 301.7701-2(a), business entities with a single owner may be disregarded as an entity separate from their owner (disregarded entities) for federal tax purposes. However, Regs. Secs. 301.7701-2(c)(2)(iv) and (v) specify that disregarded entities are not treated as separate entities for purposes of employment taxes and certain excise taxes, respectively. The final regulations clarify that, in such cases, an otherwise disregarded entity is treated as a corporation with respect to the employment and excise taxes.

The excise taxes to which this rule applies are generally those in Code chapters 31 through 36 and 38, including those on retail, manufacturing, facilities and services, wagering activities, and certain insurance policies. They do not include the indoor tanning services excise tax enacted in 2010 under Sec. 5000B, although in the regulations’ preamble the IRS acknowledged the indoor tanning tax presents similar issues and said it will issue regulations addressing the treatment of entities subject to it. The rules in the final regulations also do not apply to the firearms excise tax or the harbor maintenance tax.

The final regulations include an example of how an otherwise disregarded entity may be treated as a corporation for purposes of excise taxes (Regs. Sec. 301.7701-2(c)(2)(v)(C), Example (iv)): If an LLC liable for the Sec. 4121 tax on sale of coal by its producer fails to pay the tax, “any notice of lien the Internal Revenue Service files will be filed as if [the LLC] were a corporation.”

The regulations are effective October 26, 2011. The provisions relating to employment taxes apply with respect to wages paid on or after September 14, 2009. The provisions relating to excise taxes apply with respect to liabilities imposed in periods beginning on or after January 1, 2008.