In order to comply with the United States tax code, each year U.S. taxpayers who live or work abroad are asked to file a number of forms in addition to their individual tax return. These forms can be lengthy and complicated, and they require a great deal of information to properly fill them out. Planning ahead for next year’s tax season and getting started on your information collection can be a beneficial activity that will save you time in the future, so the team at Evolution Tax and Legal is breaking down one such tax form that a U.S. taxpayer who is involved in work abroad may have to file next year. If you have formed a business entity outside the United States that can be treated as a disregarded entity, you will be required to file Form 8858. Our international tax attorneys are giving you the relevant information on Form 8858: who needs to file it, how to file it, and what could happen if it is left unfiled.
What is Form 8858?
Form 8858 is an informational tax form that’s purpose is to collect information and records on U.S. persons who own a foreign disregarded entity. This form is less common than other international tax forms, but can have important implications for your individual and business taxes each year.
What Is a Foreign Disregarded Entity?
A foreign disregarded entity is an entity that is created outside of the United States and that is disregarded as an entity separate from its owner for U.S. income tax purposes. This is similar to the singular U.S. LLC, which is not a separate entity from its owner. This classification means that you and the business you own are considered one entity, and you will be required to pay self employed taxes on this business. Choosing to file your foreign business as an FDE could save you money on U.S. income taxes, when your accounting and tax filings are completed by a seasoned international tax professional.
Who Files Form 8858?
Form 8858 is filed by anyone who has decided to classify their foreign business as a disregarded entity. To complete this classification, you would have to check the necessary box when filing form 8832. If you classify as the tax owner of an FDE at any point throughout the year, you are required to file Form 8858. In certain cases, when you file tax Form 8865 or tax Form 5471, you will also need to file Form 8858. In addition to filing Form 8858, it is necessary to return Schedule C to the IRS to report your foreign income earned through this disregarded entity.
Form 8858 Filing Requirements
How you complete Form 8858 will depend on the type of FDE owner you are classified as. For example, if you were an owner of an FDE at some point throughout the accounting year, you will need to fill out the entire form, but you will not need to include the separate form Schedule M. If you have filed Form 5471 as a Category 4 filer or filed Form 8865 as a Category 1 filer, you should also complete the form in entirety, but it is required that you complete and attach Schedule M. If you are a Category 5 filer of Form 5471 or a Category 2 filer of Form 8865, you can just fill out the first page of Form 8858, with the identifying information.
Form 8868 will need to be attached to your individual tax returns, if you are the owner of an FDE, or attached to your Form 8865 or Form 5471 if you are not the owner of the FDE. The form is due on the same day as your individual tax return, which is typically April 15 of each year.
Form 8858 Filing Exceptions
There are certain exceptions to filing Form 8858. If you and another taxpayer are both filers of Form 8865, classified as either Category 4 or Category 5, only one person is required to file Form 8858. Consult with a seasoned international tax professional before deciding to omit Form 8858, because you will face penalties if omitted improperly.
Form 8858 Penalties
The penalties for improperly filing or failing to file Form 8858 include:
- A $10,000 penalty for each annual accounting period where you have failed to file the proper information.
- An additional $10,000 for each 30-day period, after your 90-day warning period, you fail to pay the initial penalty.
- A 10% reduction in the amount of foreign taxes you are able to use when computing your foreign tax credits.
- Other criminal penalties, including more fines and time in prison.
How Evolution Tax and Legal Can Help You File Form 8858
The penalties listed above can have a large impact on your financial situation and your business. The simplest way to streamline your tax season and be sure that you don’t face penalties is by consulting with an experienced international tax professional. The team at Evolution Tax and Legal has dually-licensed lawyers and CPAs, which allows us to understand both the accounting and the legalities behind the accounting process. Let our team start early on your taxes and informational forms. For a streamlined tax season next year, contact the team at Evolution Tax and Legal today.