U.S. Tax Filing Requirements of Foreign-Owned U.S. LLCs

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When exploring the different types of business entities one can file as within the U.S., an LLC is often a popular choice for citizens and non-citizens alike. LLCs offer many benefits, from protecting the owner from any liability the business may face to providing pass-through taxation. As we enter into a new year, many business-owners are beginning to plan for the 2021 tax season, which is rapidly approaching. The team at Evolution Tax and Legal is breaking down the filing requirements of foreign-owned U.S. LLCs, so you can prepare yourself and your business for your upcoming tax returns.

Why Incorporate as an LLC in the U.S.?

An LLC offers many benefits, both tax-related and personal benefits for the owners of an LLC. One of the benefits is the ease of forming an LLC. The process is much simpler than filing as other types of entities, such as a corporation, and owners are required to file much less paperwork to complete the process. LLCs are filed under state jurisdiction, so while the process varies from state to state, it is generally a straightforward and quick process. 

An LLC is viewed as a legal entity that is separate from the business owners, or members. This protects owners from being personally liable for any debts or legal liabilities the business may face. While money that had been contributed to the business may be at risk, similar to a shareholder losing value of a stock, the personal assets of a member remain protected through an LLC.

U.S. LLC Tax Advantages

LLCs offer great tax flexibility for the owners: while an LLC is viewed as a separate legal entity, the IRS does not view an LLC as a separate financial entity from the owners, for tax purposes. This classification allows members to choose how they are taxed on the business income, and avoid double taxation. Owners do not have to pay taxes on profits and income twice, as is the case with many standard corporations. Instead, members receive the pass-through benefit, allowing allocated profits to only be taxes once on each member’s individual tax return. Members can also utilize a deduction, as a pass-through business entity owner, and deduct 20% of their business income from their tax return.

Can an LLC Have a Foreign Owner?

A U.S. LLC can be owned by entirely foreign owners, and there are some advantages and disadvantages to be noted when filing an LLC as a foreign owner. When there is a foreign member involved in an LLC, the foreign member must have a U.S. Taxpayer Identification Number. This number is to be obtained if the LLC will be making any money within the United States, and it allows for the IRS to keep record of the individual and the business they are a member of. The process for obtaining the taxpayer identification number is not difficult, but it can take a few months before the number is assigned. All individuals, regardless of citizenship or immigration status, are required to pay taxes on any income earned within the United States.

Do Foreign Owners of U.S. LLCs Need a Visa?

Foreign owners of an LLC do not necessarily need a visa to conduct business, but if they wish to reside and conduct long-term business within the U.S. borders, they will need to acquire a U.S. visa. A foreign resident who works as a corporate officer for a U.S. business cannot receive a salary for any goods or services provided within the U.S. unless they have the necessary visa and work permits. The process for applying for a visa within the U.S. is relatively simple for skilled workers and business owners. For those who wish to do business dealings, attend conferences and consult with business partners and associates within the U.S., a B-1 visa is recommended. For those who wish to live and work in the U.S. long term, an immigrant visa such as E3 is a better option to consider.

Who Must File Form 5472?

U.S. tax form 5472 is required to be filed by any LLC that has reportable transactions within the U.S. and foreign related parties. Reportable transactions is a broad term, which can be up to interpretation by the IRS. It is recommended to file Form 5472 if there are any possible reportable transactions, as the penalty for failing to file or file incorrectly can be pricey.

U.S. LLC Tax Filing Requirements for Foreigners

Form 5472 is required to be filed by foreign members, as mentioned above. On form 5472, a member must report basic financial information about the LLC, including the value of the LLC on the last day of the tax year, the amount of money that was moved from the non-U.S. owner to the LLC throughout the tax year and the amount of money moved from the LLC to the non-U.S. owner throughout the tax year.

Form 1120 is required to be partially filled out and filed alongside Form 5472, and acts as a cover page for the form. To file both forms, it is required the member has an EIN, or an Employer Identification Number. The member must also file with their taxpayer identification number. Form 5472 cannot be filed online, and must be mailed to the IRS and postmarked by April 15 each year.

In addition to filing Form 5472 to report the business income as a foreigner, foreigners may be required to file the federal income tax return, depending on their status within the U.S. and the income earned throughout the year in the country.

Filing taxes within the U.S. can be a complicated and intricate process for citizens, and especially for foreigners and business owners. The team at Evolution Tax and Legal has seasoned international tax lawyers who are prepared to dive into the intricacies and make your tax season as seamless as possible. For help filing your LLC taxes as a foreigner, contact the team today.