Is a Single-Member Foreign Business Taxed & Reported in US?

Is a Single-Member Foreign Business Taxed & Reported in the U.S.?

Are Single-Member Foreign Businesses Taxed or Reported in the U.S.?

In several countries across the globe, including the United States, it is very common for individuals to have their own small business that is owned and operated by a single person. In the United States, one of the most common types of entity formations is the single-member LLC. Likewise, several other countries have the same similar type of structure such as a limited in the UK or PTY limited in Australia. The question then becomes whether these types of businesses that are ‘pass-through’ in a foreign country are still taxable in the United States and required to be reported on Form 5471 or other international information reporting forms. Unfortunately, foreign business reporting is complicated — even in single-member LLC equivalent scenarios. Let’s walk through some of the basics.

U.S. Person Income and Reporting

When a U.S. person owns a foreign entity and that US person owns more than 50% of the business, it can become very complicated from a U.S. tax perspective. That is because a foreign entity owned by a U.S. person may fall into the controlled foreign corporation (CFC) tax trap, which has become infinitely more complicated as a result of the TCJA and involves various issues such as GILTI, Subpart F income, Internal Revenue Code Section 965 repatriation — and other tax headaches. If the company is not considered a controlled foreign corporation, while it may be an annoyance to have to report each year (and some Form 5471 reporting may be required) the tax and reporting implications are nowhere near as bad.

What Type of Foreign Structure is it?

It is important for the US person who has a single member foreign business to determine what type of specific structure they have per the reason for that is because depending on the type of structure, it may be considered a per se corporation which means the taxpayer cannot disregard the entity if that was their intent.

Is it a Per Se Corporation?

There are several different types of foreign entities that the United States government has determined must remain corporations for U.S. tax purposes even if the taxpayer wants to disregard the entity. This is referred to as a per se corporation period two of the more common types of per se corporations that impact U.S. persons are Canadian corporations and Latin American Soceidad Anonima. In both of these types of situations, oftentimes the structures are utilized to protect assets and investments coming but from a US tax perspective that can make it even worse because then it may fall into PFIC and/or Subpart F Income.

Is U.S. Income Being Generated?

If the foreign entities are owned by one single member and generate both foreign and domestic income, then the reporting could get even more complicated because a portion of the earnings will be considered foreign and a portion of the earnings will be considered domestic. The tax implications for how foreign and domestic income are treated differ under the U.S. tax code — and this type of foreign entity may require additional tax and reporting depending on the extent of the US income from the foreign company.

Disregarding the Entity Can Have Negative Tax Implications

Some taxpayers who do not have a per se corporation may want to consider disregarding the entity for U.S. tax purposes because that may minimize the extent of the reporting that is necessary. But, with that said there are other issues once a company is disregarded — especially in scenarios in which the foreign taxes were paid by the entity and not the individual and/or where the individual may have significantly more reportable income and tax liability for U.S. tax purposes.

Getting Into Compliance

Due to the sheer complexity of foreign reporting, oftentimes it is not until several years after the person became a US taxpayer that they realize they were required to file these specific forms and report certain income sources for U.S. tax purposes. With that said, the Internal Revenue Service has also developed various amnesty programs to safely assist taxpayers with getting into compliance.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.