By Bethany Bouw, CPA
If you are a foreign person who has a US single member LLC, there are some new developments that you should be aware of for tax year 2017. Reporting policies regarding foreign ownership of single-member LLCs have recently changed. First and foremost, it is important to know your status – US or foreign. To determine this, you should check the IRS rules and contact a lawyer.
Prior to the issuance of final regulations under sections 6038A and 7701, if a foreign-owned single member LLC was treated as a disregarded entity and neither the owner nor the LLC had US sourced income or engaged in a US trade or business, there was no income or information filing required. However, a foreign-owned corporation organized in the US did have reporting requirements. The foreign-owned corporation would file a Form 5472 and disclose their ownership and related party transactions. The issued regulations now even the playing field and allow for greater transparency relating to foreign ownership/transactions.
Starting with tax years beginning on or after January 1, 2017 and ending on or after December 31, 2017, that world has changed. Foreign-owned single member LLCs must now obtain employer identification numbers (EIN) if they did not have one already and file a Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. However, Form 5472 is not a standalone form nor is it part of the Form 1040 series. Therefore, it is necessary for the entity to file a pro forma Form 1120 to attach the Form 5472. These additional filing requirements add both extra paperwork for the entity but also extension concerns.
It is not sufficient to file form 4868 to extend the Form 5472. Instead, the taxpayer must now extend their Form 5472 with a Form 7004. Best practice would be to file Form 7004 for a Form 1120 and write across the top of the form “Foreign-owned U.S. DE”.
Pro forma Form 1120
The IRS allows for the pro forma Form 1120 to be filed with reduced information. The only information they require on the Form 1120 is:
- Name & address of the foreign-owned disregarded entity
- Item B Employer Identification Number or EIN
- Item E Checkboxes for initial returns, final returns, or name/address changes
The Form 5472 would be completed and attached to this pro forma Form 1120. The Form 1120 should have written across the top of the form “Foreign-owned U.S. DE”. The pro forma Form 1120 and attached Form 5472 have a special address to be mailed to instead of the typical Form 1120 mailing addresses. The mailing address can be found in the filing instructions for Form 5472. Remember to check the form instructions each year as addresses can change from time to time.
Tips for Form 5472
Keep these four tips in mind when it comes time to file your Form 5472:
- Make sure that your total assets match what is listed as the total assets on the balance sheet. This is especially important if you are preparing the forms via PDFs.
- Double check that you have accounted for each Form 5472 in answers for lines 1g and 1h.
- Enter reference IDs that you come up with for each foreign shareholder listed and related party if they don’t have a US identifying number. This reference ID should not change each year and should be made note of to maintain consistency year to year.
- Make sure you know the ownership structure before you complete part II and save it for your records.
- The IRS may be looking at forms like Form 5472 when they consider transfer pricing to see what is being disclosed as related party transactions. Make sure you are appropriately disclosing and keeping in line with proper transfer pricing rules.
Form 5472 is not a form to trifle with as the penalties for non-compliance can be steep. The penalty is usually $10,000 for each form and if you have multiple Form 5472s due to many related parties with transactions, that penalty amount can add up quickly. There could be a variety of reasons the form is needed. If you own a US business and are a foreign person, you should reach out for assistance in making sure you have the forms you need. The adage of forewarned is forearmed is handy here. It is best to be aware of the issues or “sticky” spots before you find yourself faced with tax notices. If you think you need to file a Form 5472 and are needing help, reach out and contact a qualified tax professional for assistance.
The International Tax Team at Ryan & Wetmore is well-versed in foreign informational filings. For questions or concerns regarding your international accounts and assets, click here to email our foreign tax team. Please be aware that tax issues are complicated and may vary based on the details of your situation. For this reason, an initial phone call is generally required to obtain the facts and address the questions.
Bethany Bouw CPA, is a manager at Ryan & Wetmore and has been with the firm for over eight years. She has experience with offshore voluntary compliance and assisting taxpayers with foreign asset and entity reporting requirements.
Traci Getz CPA, is a partner with Ryan & Wetmore, P.C. Traci has over fifteen years of experience providing accounting, tax, and consulting services to small and medium-sized business owners. She works with clients to understand their accounting and tax issues while specializing in international tax, healthcare, and construction.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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