Form 8804 Instructions for Foreign Partner Withholding

I know firsthand how overwhelming financial responsibilities can be. It can be a lot to keep track of, from budgeting to taxes.

One critical task is ensuring that you’re withholding the correct amount of tax for your foreign partners.

This is where Form 8804 comes in. Understanding the form and following the instructions carefully to avoid penalties and audits is essential.

In this guide, we’ll break down everything you need about Form 8804 instructions to ensure compliance and ease your tax worries.

What is Form 8804?

So, you’ve got foreign partners and want to ensure you follow the tax rules correctly, right? Well, you need to know about Form 8804.

It summarizes any Form 8805 you sent to your foreign partners. Even if you didn’t withhold taxes, you must complete Form 8804 and attach a copy of every foreign partner’s 8805.

This is a crucial step in ensuring your partnership complies with IRS regulations. The IRS uses Form 8804 to ensure that you report the right amount of income subject to withholding tax for your foreign partners.

Understanding Partnership Withholding Tax

Suppose you have a nonresident alien as a partner in your U.S. partnership or a foreign partnership with effectively connected income (ECI) to a U.S. trade business. In that case, you need to withhold their share of ECI.

This also applies to LLCs taxed as a domestic or foreign partnership.

Now, it’s essential to know that you must pay this withholding tax even if you never make any cash distributions to the foreign partner.

This is regardless of their ultimate U.S. tax liability. But there’s good news! The withholding tax does not apply to any income not effectively connected to a U.S. business or trade.

Keep in mind that the standard withholding rates are 35% for corporate foreign partners and 39.6% for non-corporate foreign partners.

However, the rate may be lower if your business falls under certain tax treaties. If you’re unsure, it’s best to consult an experienced expat accountant to help you calculate the correct rate for your business.

Who Must File Form 8804?

If your partnership has foreign partners and effectively connected gross income, it must file Form 8804. It doesn’t matter if you had ECTI allocable to a foreign partner.

The partnership must provide a US TIN for each foreign partner to ensure the withholding tax is correctly credited when reporting to the IRS.

If any foreign partners don’t have a US TIN, the partnership should let them know they need to get one.

An individual’s TIN can be their social security number or individual taxpayer identification number

If someone doesn’t have or isn’t eligible for an SSN, they can apply for an ITIN using Form W-7.

Can I File Form 8804 Online?

No. Any forms filed to the IRS separately from Form 1065, such as Form 8804, are not included in the electronic file and must be filed on paper.

Form 8804 Instructions: How to Read

Part I – Partnership and Part II: Withholding Agent

Start by filling out the name of your partnership, then follow the instructions for the address.

If you live in a building with a specific number for your apartment or room, include it when you write down your address. If you doesn’t receive mail from the post office, then you can use a P.O. box number instead.

If your partnership receives its mail through a third party like an accountant or an attorney, enter their name and address on the street address line with “c/o” in front of it.

When entering a foreign address, include the number and street, city or town, state or province, country name, and ZIP or foreign postal code.

Follow the foreign country’s practice when placing the postal code in the address. Following these steps will ensure that your Form 8804 is filled out correctly and avoid any confusion with the IRS.

Part III: Section 1446 Tax Liability and Payments.

Lines 4a, 4e, 4i, 4m, and 4q

First, enter the total amount of effectively connected gross income (ECTI) allocated to foreign partners.

You should also include the income type for lines 4i, 4m, and 4q if you receive appropriate documentation from non-corporate partners who would be entitled to a lower tax rate on this type of income.

If your partnership has an ordinary net loss, net short-term capital loss, or net 28% rate loss, you’ll need to net each loss against the appropriate categories of income and gain.

This will help you determine the correct amounts to enter on lines 4a, 4e, 4i, 4m, and 4q. Just make sure to double-check your math to ensure accuracy.

Lines 4b, 4f, 4j, 4n, and 4r

• Find out how much you can reduce from your state and local taxes based on Regulations section 1.1446-6(c)(1)(iii).
• Look at the Reductions for State and Local Taxes section for more information on how to do this.

Lines 4c, 4g, 4k, 4o, and 4s

• Check if you received certified partner-level items from foreign partners using Form 8804-C.
• If you did, you may be eligible for a reduction in your tax amount.
• Go back to the Certification of Deductions and Losses section to get more information on how to calculate this reduction.

Line 6

• If the partnership received a form related to credits claimed on lines 6b through 6g, it must attach that form to its Form 8804 to get the credit.
• If the partnership is an upper-tier partnership in one or lower-tier partnerships, enter the tax amounts withheld by lower-tier partnerships on line 6b. This tax should be related to income allocated to the upper-tier partnership.
• If a lower-tier PTP (publicly traded partnership) reports tax withheld on Form 1042-S, enter that amount on line 6c. The amount of tax withheld should be reported in box 7a of Form 1042-S, and income code 27 should be shown in box 1.
• For partnerships treated as foreign persons and subject to withholding under section 1445(a) or 1445(e)(1), enter the amount of tax withheld on line 6d.
• If a domestic trust withholds tax on a distribution to the partnership related to the disposition of a USRPI (United States real property interest), enter the amount of tax withheld on line 6e.
• If a non-PTP engaged in the conduct of a U.S. trade or business withholds tax from the partnership on a transfer of an interest, but only to the extent that the amount is allocable to foreign partners, enter the amount of tax withheld on line 6f. The amount of tax withheld should be reported in box 7a of Form 1042-S, and income code 57 should be shown in box 1.

Line 8

If you attached Schedule A (Form 8804), check the box on this line and write down any penalty amount.

H4: Line 12

Moving to line 12, if your partnership has paid more tax than it owes (overpayment) and wants to share it with its partners, write down the amount you wish to allocate to your partners on this line.

Also, include the amount allocated to each partner on line 10 of Form 8805.

What Happens If I Don’t File Form 8804 On Time?

If you’re a partnership, you have to file something called “Form 8804” every year by the 15th day of the fourth month after your tax year ends. If you don’t do it on time, you might get a penalty.

If you don’t file your tax return on time, you might have to pay a penalty. The penalty is usually 5% of the tax you owe for every month (or part of a month) that your return is late. But don’t worry, the penalty won’t be more than 25% of the tax you owe.

However, if you had a reasonable cause for filing late, you might not have to pay the penalty.

If you need more time to file, you can ask for an extension by filling out “Form 7004”. This will give you an automatic extension of time to file your tax return.

Where Do I Send My IRS Form 8804?

When you have completed your Form 8804, send it to the following address:

Internal Revenue Service

P.O. Box 409101

Ogden, UT 84409

In Comclusion

Completing Form 8804 is necessary to maintain compliance with partnership withholding tax requirements for foreign partners. The form must be completed and filed by the due date to avoid penalties.

Partnerships must pay withholding tax on foreign partners’ share of effectively connected income, even if the partnership never makes any cash distributions to the foreign partner, regardless of the foreign partner’s ultimate U.S. tax liability.

The good news is that the withholding tax does not apply to any income that isn’t effectively connected to a U.S. business or trade.

If you have any questions about completing Form 8804 or partnership withholding tax requirements, consult tax professionals from XOA Tax, who can help you navigate the complexities of the tax code.