A disregarded entity is a tax term that refers to an entity that will be disregarded or ignored for federal income tax purposes. The most common disregarded entity is a single-member limited liability company (SMLLC) that reports its income on its owners return. The owner of a disregarded entity reports the income of the disregarded entity on the owners return. If an entity is disregarded as a separate entity for federal income tax purposes, it is also disregarded as a separate entity for state income tax purposes.

Here are some key points about disregarded entities:

• A single-member LLC that is classified as a disregarded entity for income tax purposes is treated as a separate entity for purposes of employment taxes and certain excise taxes.
• The owner of a single-member LLC has a choice. By default, the LLC will be classified by the IRS as a disregarded entity. This means the LLC will be treated for federal income tax purposes as if it was a sole proprietorship. If the owner wants to, however, he or she can elect to have the LLC taxed as a corporation, in which case the LLC is not a disregarded entity.
• A disregarded entity enjoys substantial tax advantages. Unlike regular corporations, a disregarded entity is not subject to double taxation, where a corporation pays taxes on its profits and then the profits are taxed again when the corporation’s owners receive dividends. It’s also simpler for a disregarded entity to handle income taxes, since it doesn’t have to file its own separate return.
• Partnerships, corporations, and LLCs with more than one member are not disregarded entities.
• An individual, estate, trust, partnership, tax-option (S) corporation, limited liability company (LLC), or corporation filing a state return that is the owner of a disregarded entity must complete a Disregarded Entity Schedule.

In summary, a disregarded entity is a tax term that refers to an entity that will be disregarded for federal income tax purposes. The most common disregarded entity is a single-member limited liability company (SMLLC) that reports its income on its owners return. A disregarded entity enjoys substantial tax advantages and is not subject to double taxation.