The entity taxed as a pass-through for income tax purposes is pervasive in the modern business climate. Numerous types of entities may be treated as pass-through entities; the classic examples are corporations that have elected to be taxed under Subchapter S of the Internal Revenue Code and partnerships. In addition, entities such as limited liability companies that have been created under state law, may elect to be taxed as partnerships.
The “check the box” rules established by Treasury Regulations, effective Jan. 1, 1997, transformed the process of how an entity is classified for income tax purposes from an expensive and involved process into a far simpler exercise involving the completion of Internal Revenue Service (IRS) Form 8832. The choice of conducting business under the pass-through regime can create numerous opportunities and (often unintended) obstacles on both the federal and state level.
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