Preparing your business income tax return can be a task that leaves you with more questions than answers. Most tax payers believe they benefit from using a professional tax preparer.
For nonresidents who do not speak the language and do not live on a day to day basis with the US Tax System the challenges are significant.
Most nonresident property investors who purchase their property through a business entity will use an LLC. Many nonresident investors confuse this type of entity with a corporation. An LLC is not a Corporation although it does provides similar liability protection.
The LLC is not itself taxed, it is considered to be a flow through entity and the tax reporting is dependent on whether it has one or multiple members(owners).
If it is owned by one person/entity it is called an SMLLC, an SMLLC is considered a disregarded entity by the IRS, this does not mean the income is not taxed it is just declared on the individual owners personal tax return.
If the LLC has more than one member it is called a multi member LLC, in this case the LLC is not itself directly taxed but is required to file an informational tax return with the IRS. The net income is calculated on the tax return but it is not taxed instead it is flowed to the members on a K1 form. The information from the K1 form is then declared on the members personal income tax return.
This structure is complex for nonresidents, there are significant penalties for the late filing of the informational tax return, the LLC is required to withhold 39.6% of the income attributable to any foreign member and the members are required to prepare two sets of tax returns one for themselves as an individual and a partnership informational tax return for the LLC.
Some nonresident investors purchase using a US C Corporation. This is unusual because of the double taxation of income from the corporation. In this case the corporation files a Corporate tax return and pays tax on the net income from the property investment. The net income is then taxed a second time when it is distributed to its shareholders as a dividend. The C Corp is required to withhold 30% of the dividend distribution to a nonresident shareholder and pay it to the IRS. The nonresident shareholder does not file a tax return and has no way to recover the withheld tax from the IRS. The only way to reduce the withholding tax is if a Tax Treaty exists between the shareholders country of residence and the US which has an article which reducess the tax rate on dividends.
Finally some nonresident investors may invest through their own foreign corporation, the key advantage of this is that the investor is protected from Estate taxes. However in this situation the tax liability is similar to the C-Corp above. The foreign corporation files a foreign corporate tax return and pays tax on the net income, and then is subject to Branch Profits tax on the after tax income. This is essentially a proxy tax representing the tax on the dividend above. As with the dividend above Branch Profit tax may be reduced by Tax Treaty.
The tax situation for nonresidents who have invested through a business entity is complex much of the time in our experience the investor has no idea of the tax consequences of the entity they have chosen or the additional fees and reporting requirements to maintain the entity at the State level.
We highly recommend that you contact us immediately if you hold your property in a business entity so that we can discuss the tax implications and ensure that you do not incur any additional penalty or interest charges by not fulfilling all of your obligations.
Whether we like it or not, today's tax laws are so complicated that filing a business tax return for a nonresident owner can be confusing. It is just too easy to overlook the filing requirements, deductions and credits to which they are entitled and claim expenses that are not allowed. There is little if any computer software programs available to nonresidents who own through business entities and few tax preparers who specialize in this area therefore it is very important to find the assistance of an experienced tax professional.
Here's what you get when you choose MyTaxAdvisorOnline LLC to prepare your business tax returns and support your state entity registration and annual reporting requirements...
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