The legal form established for an entity may govern whether the entity is taxable or tax-exempt. Many entities are exempt from paying taxes because they qualify as either tax-exempt (e.g., not-for-profit organization) or pass-through entities (e.g., Subchapter S corporation, partnership, and certain LLCs) or because they function similarly to pass-through entities (e.g., real estate investment trusts [REITs] or regulated investment companies). To qualify for tax-exempt or pass-through treatment, such entities must meet certain conditions under the relevant tax law. According to the definition of a tax position in ASC 740-10-20, the recognition and measurement of a decision to classify an entity as tax-exempt should be evaluated under ASC 740. See Section 18.104.22.168 for additional discussion of the evaluation of an entity’s tax-exempt status.
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