FAQ

Table of contents

1 What is IRS form 1120?

IRS Form 1120 is an income tax return form used by corporations and LLCs to report their income, gains, losses, deductions, and credits to the Internal Revenue Service (IRS). It is also used to calculate the corporation’s and LLCs income tax liability.

In the context of foreign-owned disregarded LLC, owners (members) mostly need a pro-forma form 1120.

2 Foreign-owned Single-Member LLC and IRS Form 1120 – some of the challenges

  1. Difficulty in obtaining a U.S. Employer Identification Number (EIN): A foreign-owned single-member LLC must obtain a U.S. Employer Identification Number (EIN) in order to file Form 1120. This can be a challenge for foreign owners, as the process of obtaining an EIN can be complicated and time-consuming.
  2. Difficulty in understanding the filing requirements: Foreign owners may find it difficult to understand the filing requirements for Form 1120, as the form is complex in the context of the actual provision and the instructions can be difficult to interpret.
  3. Difficulty in obtaining the necessary information: Foreign owners may have difficulty obtaining the necessary information to complete Form 1120, such as financial statements, tax returns, and other documents.
  4. Difficulty in understanding the tax implications: Foreign owners may find it difficult to understand the tax implications of filing Form 1120, as the form is complex in the context of the actual provision and the instructions can be difficult to interpret.
  5. Difficulty in obtaining professional assistance: Foreign owners may have difficulty obtaining professional assistance to complete Form 1120 and Form 5472. We have compiled an article for you HERE in which we warn against inadequately qualified helpers who often operate illegally without a permit from the IRS.

3 What is IRS form 5472?

IRS Form 5472 is an informational return used to report certain transactions between a foreign corporation or natural person and a U.S. corporation. It is used to report transactions such as the sale of goods, services, or property, the payment of royalties, and the transfer of intangible property.

4 Foreign-owned Single-Member LLC and IRS Form 5472 – some of the challenges

  1. The foreign-owned single-member LLC must file IRS Form 5472 to report any transactions between the LLC and its foreign owner.
  2. The LLC must provide the IRS with detailed information about the transactions, including the date, amount, and purpose of the transaction.
  3. The LLC must also provide the IRS with the name, address, and taxpayer identification number of the foreign owner.
  4. The LLC must keep detailed records of all transactions with the foreign owner, including copies of any documents related to the transaction.
  5. The LLC must also provide the IRS with a copy of the LLC’s tax return, which must include a statement that the LLC has complied with the filing requirements of Form 5472.
  6. The LLC must also provide the IRS with a copy of the LLC’s financial statements.
  7. The LLC may also provide the IRS with a copy of the LLC’s Articles of Organization.
  8. The LLC may also provide the IRS with a copy of any agreements between the LLC and its foreign owner.
  9. The LLC may also provide the IRS with a copy of any documents related to the transfer of funds between the LLC and its foreign.

5 What is a disregarded entity for the IRS?

A disregarded entity is a business entity that is not recognized as a separate entity from its owner for federal tax purposes. This means that all of the entity’s income, deductions, and credits are reported on the owner’s individual tax return. Common examples of disregarded entities include single-member limited liability companies (LLCs) and qualified subchapter S subsidiaries (QSubs).

6 What is a EIN and how do I get a EIN?

An Employer Identification Number (EIN) is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to identify a business entity. It is used for tax filing and reporting purposes. To obtain an EIN, you must complete an IRS Form SS-4 and submit it to the IRS. You can apply for an EIN online, by fax, or by mail.

7 How is a foreign-owned LLC taxed in the US?

A foreign-owned LLC in the US is taxed in the same way as a domestic LLC. The LLC must file an annual tax return with the IRS and may, of course, have to pay taxes and/or other duties in the USA.

For single member LLCs, the IRS provides: “If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return.” It must be added, that the single member LLC should also not has elected to be taxed as a separate entity for federal tax purposes.

This means that nonresident aliens (non-U.S.-citizens and non-U.S.-residents) without economic nexus and without ETBUS in the U.S. (other rules may also apply) have to declare the tax data of their single member LLC only in their personal income tax return in their country of tax residence. For example, if a German citizen is tax resident in Panama and has no economic nexus and no ETBUS in the U.S., he reports the profit from his single member U.S. LLC on his personal income tax return in Panama, and he may be able to expect a legal overall tax rate of currently 0%. It should be noted that tax laws can, of course, change and the citizenship of the LLC owner can also play a role.

Thus, the overall taxation of a foreign-owned single member LLC is to see in the context of U.S. tax law, the tax law of the owner’s country of tax residence and, in very rare cases, the country of citizenship. At Taxes4Foreigners, we can help you meet your U.S. tax obligations.

8 Can a disregarded entity in the USA be owned by a foreign individual?

Yes, a disregarded entity in the United States can be owned by a foreign individual. The foreign individual would be considered the owner of the disregarded entity and would be responsible for filing any necessary taxes and paperwork.

9 What is Form 1040NR?

Form 1040NR is a tax form used by nonresident aliens to report their income and calculate their U.S. income tax liability. It is similar to Form 1040, which is used by U.S. citizens and resident aliens to report their income and calculate their U.S. income tax liability.

10 List of some challenges regarding Form 1040NR

  1. Understanding the differences between Form 1040NR and Form 1040
  2. Determining the correct filing status
  3. Calculating the correct amount of tax owed
  4. Completing the Schedule NEC
  5. Understanding the rules for foreign earned income exclusion
  6. Determining the correct residency status
  7. Understanding the rules for foreign tax credits
  8. Completing the Schedule OI
  9. Understanding the rules for deductions and credits
  10. Understanding the rules for self-employment taxes

11 Non-U.S. citizen or person, Substantial Presence Test

The IRS considers LLCs as disregarded entities under certain circumstances. One of the requirements is that the owner of the LLC is a non-U.S. person or citizen (see more here) and is not otherwise taxed in the United States. In short, only nonresident aliens (“A nonresident alien is an individual who is not a U.S. citizen or a resident alien.”) can hold LLCs, which are seen as disregared entities by the IRS. In particular, the owner of an LLC should not spend “too many” days per year in the US. For this purpose, the IRS has developed a “Substantial Presence Test”. The IRS states:
You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least: 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting: All the days you were present in the current year, and 1/3 of the days you were present in the first year before the current year, and 1/6 of the days you were present in the second year before the current year.

On its website, the IRS elaborates on what is meant by this: https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

12 What is a EIN and what can you do for me to get one?

The IRS states: “An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity. Generally, businesses need an EIN.”

This means that every LLC or American company needs an EIN. We can provide you with an EIN for your company. Please feel free to contact us.

13 What is an ITIN and how can you get one for me?

The IRS states:
An Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the Internal Revenue Service. The IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain, a Social Security number (SSN) from the Social Security Administration (SSA). In practice, this means that non-Americans cannot obtain an SSN and therefore need an ITIN as a substitute. […] ITINs do not serve any purpose other than federal tax reporting.
Do you need an ITIN? The IRS states, that you can apply for an ITIN, if:
  1. You do not have an SSN and are not eligible to obtain one, and
  2. You have a requirement to furnish a federal tax identification number or file a federal tax return, and
  3. You are in one of the following categories:
    • Nonresident alien who is required to file a U.S. tax return
    • U.S. resident alien who is (based on days present in the United States) filing a U.S. tax return
    • Dependent or spouse of a U.S. citizen/resident alien
    • Dependent or spouse of a nonresident alien visa holder
    • Nonresident alien claiming a tax treaty benefit
    • Nonresident alien student, professor or researcher filing a U.S. tax return or claiming an exception
If so, then you must apply for an ITIN.
In practice, our customers need an ITIN to open a bank account in the US or to connect to a payment service provider. We will be happy to apply for the ITIN for you.
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