Information Release

CF 1997-01 - IRS "check-the-box" entity selection regulations - August 19, 1997

Recently-promulgated IRS regulations regarding entity selection (often referred to as the "check-the-box" regulations) generally permit unincorporated entities (limited liability companies and partnerships) to choose (elect) whether to be treated for federal income tax purposes as partnerships or as corporations.¹ If such unincorporated entities do not affirmatively choose (elect) either form, then the "default" is generally the partnership form.

Under Ohio Revised Code section 5733.01, if an LLC or a partnership with Ohio nexus defaults or chooses to be treated as a partnership for federal income tax purposes, then the entity generally will not be taxed as a corporation for Ohio corporation franchise tax purposes.² If an LLC chooses to be treated as a corporation for federal income tax purposes, then the LLC will be taxed as a corporation for franchise tax purposes. See ORC section 5733.01. If a partnership chooses to be taxed as a corporation for federal income tax purposes, the partnership will be subject to the Ohio franchise tax for taxable years ending after September 28, 1997.³

If you have any questions regarding this matter, please contact the Income Tax Audit Division at 614-433-7608.

_________________________________
¹Corporations, however, cannot choose to be treated other than as corporations (C corporations or S corporations)

²However, if the entity is a one member LLC and if the entity defaults to or chooses the noncorporate tax status, then the entity will be treated either (i) as a division if the LLC's member is a corporation or partnership or (ii) as a sole proprietorship if the LLC's member is an estate or an individual.

³The recently enacted budget bill, Am. Sub. H.B. 215, 122nd General Assembly, amended ORC sections 5733.01(E) and 5733.01(F) to state that if a "for profit" entity is taxed as a corporation for federal income tax purposes, then the entity is treated as a corporation for Ohio franchise tax purposes:

• "(E) A business trust ANY PERSON, as defined in division (A) of section 1746.01
  5701.01 of the Revised Code, shall be treated as a corporation organized for profit
  for purposes of this chapter.

  (F) A limited liability company formed under Chapter 1705. of the Revised Code
  or under the laws of any other state shall be treated as a corporation for purposes
  of this chapter only if the company PERSON is classified for federal income tax
  purposes as an association taxable as a corporation."

Section 222 of the budget bill states that the amendments to ORC section 5733.01 take effect "on the ninety-first day after the act is filed with the [Ohio] Secretary of State." The ninety-first day is September 29, 1997.