Form 8804 Instructions for Foreign Partner Withholding (Tax Year 2024)

Frances

October 25, 2024

At XOA TAX, we often work with partnerships that have foreign partners. This brings up some unique tax considerations, especially when it comes to withholding taxes. A key form in this process is Form 8804, and we’re going to break it down for you in this blog post.

Key Takeaways:

Form 8804 summarizes the information from Form 8805, which you issue to each foreign partner to report their share of income and any tax withheld.
You must file Form 8804 even if you didn’t withhold any taxes.
Withholding tax is due on foreign partners’ share of effectively connected income (ECI), regardless of whether distributions are made.
Late filing can result in penalties.

What is Form 8804?

Form 8804, “Annual Return for Partnership Withholding Tax (Section 1446),” is used by partnerships with foreign partners to:

Report their total tax liability under Section 1446.
Summarize the information from the Form 8805s issued to each foreign partner.

The IRS uses this form to ensure you’re correctly withholding and reporting taxes on income allocable to foreign partners.

Understanding Partnership Withholding Tax

If your partnership has foreign partners and generates income effectively connected to a U.S. trade or business (ECI), you must withhold tax on the foreign partners’ share of that income. This applies even if you don’t make any cash distributions.

What is Effectively Connected Income (ECI)?

ECI is generally income derived from a U.S. trade or business. This can include income from:

U.S.-based sales of goods or services
Rental income from U.S. property
Gain from the sale of U.S. assets used in a trade or business

Important Considerations:

Withholding Rates: The withholding rate for corporate foreign partners is generally 35%, but it’s crucial to consult the latest IRS guidelines or a tax professional to confirm the accurate rate for the 2024 tax year, as rates are subject to change. For individual foreign partners, the rate is based on the individual income tax brackets.
Tax Treaties: Tax treaties between the U.S. and certain countries may provide for reduced withholding rates or exemptions on certain types of income. Common treaty provisions include reduced rates on dividends, interest, and royalties. Refer to the specific treaty or consult a tax professional to determine the applicable rates and provisions.
Form 8804-C: Foreign partners can use Form 8804-C to certify deductions and losses that can reduce their ECI and potentially eliminate their withholding tax liability. Refer to the IRS instructions for Form 8804-C for detailed information on its use and eligibility requirements.
FIRPTA Withholding: If the partnership disposes of a U.S. Real Property Interest (USRPI), it may be subject to the Foreign Investment in Real Property Tax Act (FIRPTA) withholding rules. This requires the partnership to withhold a percentage of the gain realized on the disposition, even if the foreign partner’s share of the gain is not ECI. Consult the IRS guidelines on FIRPTA withholding for more information.

Who Must File Form 8804?

Any partnership with foreign partners and effectively connected gross income must file Form 8804, regardless of whether any tax was withheld.

Completing Form 8804

Form 8804 is divided into several parts:

Part I and II: Provide basic information about the partnership and the withholding agent.
Part III: Calculates the Section 1446 tax liability. This involves reporting ECI allocated to foreign partners, taking into account any applicable reductions for state and local taxes or certified deductions from Form 8804-C.
Line 6: Reports any tax withheld by lower-tier partnerships or other withholding agents. If the partnership is an upper-tier partnership, it must include the tax withheld by any lower-tier partnerships on income allocated to the upper-tier partnership’s foreign partners.
Line 8: Indicates if Schedule A (Form 8804) is attached to claim a credit or refund.
Line 12: Used to allocate any overpayment of tax to the partners. This information should also be reported on Form 8805.

The Interplay of Forms 8804, 8805, and 8813:

Form 8805: Provides information to each foreign partner about their share of ECI, deductions, and tax withheld. The partnership uses the information from Form 8805 to complete Form 8804.
Form 8813: Used to make estimated tax payments throughout the year. The total tax payments made using Form 8813 are reported on Form 8804.

Filing Form 8804

Form 8804 must be filed by the 15th day of the fourth month after the end of the partnership’s tax year. For calendar year partnerships, this means April 15th.

Can I File Form 8804 Online?

Form 8804 can be included as part of an electronically filed Form 1065. Check the IRS website for the latest information on electronic filing requirements and procedures.

Late Filing Penalty

Failure to file Form 8804 on time may result in a penalty of 5% of the unpaid tax for each month or part of a month that the return is late, up to a maximum penalty of 25% of the unpaid tax.

Where to Mail Form 8804

Mail your completed Form 8804 to:

Internal Revenue Service
P.O. Box 409101
Ogden, UT 84409

Estimated Tax Payments

Partnerships may be required to make estimated tax payments throughout the year to avoid penalties. These payments are generally due quarterly on:

April 15th
June 15th
September 15th
December 15th

Refer to Form 8813, “Partnership Withholding Tax Payment (Section 1446),” for instructions and details on calculating and paying estimated taxes.

Amended Returns

If you need to correct information on a previously filed Form 8804, you can file an amended return using Form 8804-X, “Amended Annual Return for Partnership Withholding Tax (Section 1446).”

State Tax Considerations

State tax laws may also impact withholding requirements for foreign partners. Consult your state’s tax agency for specific guidance.

Documentation and Recordkeeping

Maintain accurate records of all relevant documents, including Forms 8805, estimated tax payments, and supporting documentation for deductions and credits.

Common Mistakes to Avoid:

Failing to file Form 8804 even if no tax was withheld.
Incorrectly calculating ECI.
Not considering applicable tax treaties.
Missing estimated tax payment deadlines.
Failing to obtain US TINs for all foreign partners.

FAQ about Form 8804

Q: What if I need to correct a mistake on a previously filed Form 8804?

A: You can file an amended return using Form 8804-X.

Q: Do state tax laws affect withholding requirements for foreign partners?

A: Yes, they can. It’s a good idea to check with your state’s tax agency for specific rules.

Q: What kind of records should I keep related to Form 8804?

A: Keep thorough records of everything! This includes Forms 8805, records of estimated tax payments, and any documents that support deductions or credits.

Need Help?

Navigating the complexities of partnership withholding tax can be challenging. At XOA TAX, we have extensive experience in this area and can provide expert guidance to ensure you meet all your filing obligations and optimize your tax position. Contact us today to schedule a consultation:

Website: https://www.xoatax.com/

Phone: +1 (714) 594-6986

Email: [email protected]

Contact Page: https://www.xoatax.com/contact-us/