As a non-U.S. resident with a U.S. single-member LLC, staying compliant with tax laws is crucial. Whether for Amazon Insurance, Shopify payments, or bulk purchases from a U.S. manufacturer, IRS forms 5472 and proforma 1120 for your U.S. single-member LLC disregarded likely must be filed annually.
LLC may require filing Form 5472 and proforma 1120 annually. These forms will come into play the following year after you form your U.S. single-member LLC and obtain an EIN through the IRS. It is important to note how your SS4 was completed, especially for line 9a.
Form 5472 is an information return of a 25% foreign-owned U.S. corporation or a foreign corporation engaged in a U.S. trade or business under sections 6038A and 6038C of the internal revenue code.
It’s important to note that the taxation of a U.S. LLC can vary based on its structure, with single-member LLCs taxed as C corporations requiring both Forms 5472 and 1120. On the other hand, non-resident members of an LLC taxed as a partnership must file IRS Forms 1065, 8804, and 8805.
A failure to timely file a Form 5472 is subject to a $25,000 penalty per information return, plus an additional $25,000 for each month the failure continues, beginning 90 days after the IRS notifies the taxpayer of the failure, with no maximum penalty.
What is new on the instructions for 5472 in 2023?
Part VII lines 41a through 41d. On Form 5472, these lines have been reworded to reflect the final regulations under section 250 (T.D. 9901, 85 FR 43042, July 15, 2020, as amended by 85 FR 68249, Oct. 28, 2020; T.D. 9956, 86 FR 52971, Sept. 24, 2021).
Part VIII lines 48b and 48c. These instructions require a new attachment for Part VIII, lines 48b and 48c. Specifically, if the taxpayer made the election described in Regulations section 1.482-7(d)(3)(iii)(B) or Notice 2005-99, the taxpayer is required to attach the statement described in the instructions for Part VIII, lines 48b and 48c, later.
You would use form 5472 when reportable transactions occur during the tax year of a reporting corporation with a foreign or domestic related party.
What is a Reporting Corporation? A reporting corporation is either:
- A 25% foreign-owned U.S. corporation (including a foreign-owned U.S. disregarded entity (DE), or
- A foreign corporation engaged in a trade or business within the United States.
Reportable transaction. A reportable transaction includes:
- Any transaction listed in Part IV (for example, sales, rents, etc.) for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year;
- Any transaction listed in Part V; or
- Any transaction or group of transactions listed in Part VI.
However, transactions with a U.S.-related party are not required to be identified explicitly in Parts IV, V, and VI.
Exceptions from filing. A reporting corporation must not file Form 5472 if any of the following apply.
- It had no reportable transactions of the types listed in Parts IV and VI of the form and, in the case of a reporting corporation that is a foreign-owned U.S. DE, also had no reportable transactions of the type listed in Part V of the form.
- A U.S. person that controls the foreign-related corporation files Form 5471 for the tax year to report information under section 6038. To qualify for this exception, the U.S. person must complete Schedule M (Form 5471) showing all reportable transactions between the reporting corporation and the related party for the tax year. This exception does not apply to foreign-owned U.S. D.E.s.
- The related corporation qualifies as a foreign sales corporation for the tax year and files Form 1120-FSC. This exception does not apply to foreign-owned U.S. DEs.
- It is a foreign corporation that does not have a permanent establishment in the United States under an applicable income tax treaty and timely files Form 8833.
- It is a foreign corporation whose gross income is exempt from taxation under section 883, and it timely and fully complies with the reporting requirements of sections 883 and 887.
- Both the reporting corporation and the related party are not U.S. persons, as defined in section 7701(a)(30), and the transactions will not generate in any tax year*:
- Gross income from sources within the United States or income effectively connected, or treated as effectively connected, with the conduct of a trade or business within the United States; or
- Any expense, loss, or other deduction that is allocable or apportionable to such income.
Note. *Exception 6 does not apply to foreign-owned U.S. DEs.
Foreign-owned U.S. DEs. While a foreign-owned U.S. DE has no income tax return filing requirement, as a result of final regulations under section 6038A, it will now be required to file a pro forma Form 1120 with Form 5472 attached by the due date (including extensions) of that Form 1120.
The foreign-owned U.S. DE has the same tax year used by its owner for U.S. tax filing requirements. If a foreign corporation owns the U.S. LLC DE, that structure triggers different tax returns.
They have a dedicated mailing address. Foreign-owned U.S. DEs are required to use the following dedicated mailing address. These filers do not use the mailing address provided in the Instructions for Form 1120.
Extension of time to file. A foreign-owned U.S. DE required to file Form 5472 can request an extension of time to file by filing Form 7004. The DE must file Form 7004 by the regular due date of the return because of Form 5472 of a DE. Must be attached to a pro forma Form 1120; the code for Form 1120 should be entered on Form 7004, Part I, line 1. “Foreign-owned U.S. DE” should be written across the top of Form 7004.
The DE must fax or mail Form 7004 to the fax number or mailing address identified earlier by the return’s due date (excluding extensions). For these entities, do not use the regular filing address listed in the Instructions for Form 7004.
Depending upon multiple factors, you may have additional U.S. tax forms, including whether your LLC is engaged in a U.S. trade or business and has effectively connected income. If so, filing forms 1040NR and W-7 may be required.
Essential additional tax forms and terms that may impact your U.S. tax responsibilities.
- 1040NR and W-7 (ITIN): If you are deemed engaged in a U.S. trade or business, filing the protective returns, 1040NR, W-7, 8833 (assuming from a treaty country). You could lose deductions if you don’t file the protective returns and are audited.
- Conduct of a U.S. trade or business (USTB): If you are engaged in U.S. trade or business, you need to file a U.S. return. But if NO US-sourced income= title is transferred outside the U.S. If, outside the U.S., there is no US-sourced income and no effectively connective return. BUT no tax due, foreign source income if Title transfers outside the U.S. What determines if it is US-sourced income? Where Title has transferred. See IRS PDF for more details on USTB.
- Effectively Connected Income (ECI): Effectively connected income is income that is effectively connected with the conduct of a U.S. trade or business. When determining whether income constitutes effectively connected income, the IRS employs two tests: (i) the asset-use test; and (ii) the business-activities test. The asset-use test looks to whether the income or gain is derived from assets used in, or held for use in, the conduct of the trade or business in the United States. The business-activities test looks to whether the activities of the trade or business were conducted in the United States and were a material factor in realizing the income or gain at issue.
- Fixed, Determinable, Annual, Periodic Income (FDAP): Tax at a 30% (or lower treaty) rate applies to FDAP income or gains from U.S. sources, but only if they are not effectively connected with your U.S. trade or business.
- Foreign Bank Account Annual Report (FBAR): The FBAR (Foreign Bank Account Report) is important if you’re a U.S. citizen with $10,000 or more non-U.S. accounts. Does this apply to non-residents?
If a person is a non-resident (non-U.S. citizen and non-legal permanent resident), then they are considered a non-resident and would generally not be required to file the FBAR. Here is a link to FBAR mistakes to avoid.
- Form 1042-S – Every US person, business, or institution providing income to non-citizen individuals must file a Form 1042-S, even if ultimately the payments they made were exempt from taxation because of a treaty or taxation exception.
The form applies to all payments made to non-resident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts subject to tax withholding.
- Hybrid Entities – From a U.S. tax perspective, a hybrid entity is an entity that is “fiscally transparent” for U.S. tax purposes but not fiscally transparent for foreign tax purposes. Learn more about hybrid entities at this link; a sharp U.S. tax attorney with great U.S. tax charts for your review.
- Branch Profits Tax – U.S. tax law imposes a 30% branch profits tax on a foreign corporation’s U.S. branch earnings and profits for the year that are effectively connected with a U.S. business to the extent that they are not reinvested in branch assets.
Branch Profits tax ONLY comes into play with a foreign corporation with a permanent establishment (PE) in the U.S. A U.S. corporation owned by a foreign corporation is not subject to branch profits but a dividend withholding tax, which the treaty can reduce.
- State Sales Tax: If you sell on a non-marketplace such as Shopify and crossed economic nexus thresholds, you must register for sales tax and collect and remit if your product is subject to sales tax.
Remember that some products, such as supplements, digital products, software, and food items, are not taxable in every state. These sales tax rules apply to non-U.S.-based entities doing business in the U.S.
This content is an overview of several complex tax subjects, and we recommend you work with a qualified tax professional of which we work with several that we can recommend.