Are you a US taxpayer who owns a business or property in a foreign country?
Do you engage in activities such as traveling internationally, exploring foreign markets, or purchasing assets abroad?
If so, you might be wondering about your tax obligations and how to ensure compliance with US tax laws.
Well, fear not because Form 8858 is the key to international tax compliance.
In this blog post, let’s take a journey together and explore what Form 8858 is, why it’s necessary, and who needs to file it.
We’ll also discuss the information requirements, the due date, and the penalties for filing Form 8858 late.
So, buckle up, and let’s get started!
- A foreign disregarded entity (FDE) is a non-US business entity not taxed. Any income it generates is treated as the owner’s income, who is responsible for all taxes.
- Form 8858 is typically due on April 15th (April 18, 2023), along with your federal tax return. Suppose you are a US taxpayer living abroad. In that case, you automatically receive a two-month filing extension until June 15th and can request an additional extension until October by filing a request by June 15th to avoid penalties.
What Is IRS Form 8858?
US taxpayers who own an FDE may be required to file Form 8858, an informational tax form that provides details about the entity to the IRS. Note that filing this form does not result in any additional tax.
Understanding Foreign Disregarded Entity
A foreign disregarded entity (FDE) refers to any non-US business entity treated as disregarded for tax purposes.
This means that the business is not taxed; the company’s income is treated as the owner’s income.
The owner of foreign disregarded entities is responsible for all taxes on the businesses.
The income an FDE generates is reported by its owner(s) on their tax returns and is taxed at their ordinary tax rate.
Owners of a corporation are only taxed when they receive dividends or sell their shares, whereas owners of a sole proprietorship or FDE are taxed the same way.
An FDE is still recognized as separate from its owner, which helps limit the owner’s liability. This makes it a popular choice for entrepreneurs who want the benefits of both sole proprietorships and corporations.
Who Must File Form 8858?
If you’re a US taxpayer with a foreign entity considered disregarded for US income tax purposes, you must file Form 8858. That’s it, plain and simple.
It’s important to note that owning a foreign entity isn’t the only criterion for filing Form 8858. You may also need to file Schedule M (Form 5471) if you own an FDE for tax purposes, operate a foreign branch, or have an interest in entities that are tax owners of FDE or FBs.
But, if you’re only concerned about filing Form 8858, remember that it applies to US taxpayers who own foreign disregarded entities.
Foreign Disregarded Entity Classification
To elect to be treated as an FDE, you must file Form 8832, also known as the “check the box election,” with the IRS. This is typically done to avoid being treated as a foreign corporation, which could result in having to file the more complex Form 5471.
You must also obtain an Employer Identification Number (EIN) for your FDE. You can do this by calling the IRS at +1-267-941-1099, and you will receive an EIN immediately over the phone.
There are two categories of FDE owners for tax filing purposes: tax owners and direct owners. Tax owners are responsible for the FDE’s assets and liabilities for tax purposes, while direct owners are the legal owners of the FDE.
The IRS created these two categories to prevent owners from exploiting any loopholes that might allow them to avoid filing Form 8858.
US persons File Form 8858
The IRS requires US persons to file Form 8858 if they fall into any of the following categories:
- If you’re required to file Form 5471 or Form 8865 for the controlled foreign corporation (CPC) or the controlled foreign partnership (CFP), respectively, and you own an FDE or operate an FB.
- If you’re a US partnership that is a direct or indirect tax owner of the FDE.
- If you’re a US corporation, except for RIC, REIT, or an S corp, and you are interested in a US partnership that owns an FDE.
You might be wondering what the IRS defines as a US person. Well, according to the IRS, a US person is any of the following:
- A US citizen or resident alien.
- A domestic partnership, corporation, or trust.
- Any estate is other than those foreign estates that are expressly excluded.
So, if you fall into any of these categories, file Form 8858 to ensure compliance with US tax laws.
Information Requirements in Form 8858
You’ll need to provide detailed information about your foreign disregarded entity, including identifying information about the tax owner and the entity itself.
Additionally, you’ll need to provide a summary of your FDE’s financial statements, which include an income statement and a balance sheet.
The income statement shows your earnings and expenses during the annual accounting period or tax year.
This is where you report the profit you made during that period. The balance sheet reflects your financial position and details your assets, liabilities, and equity.
Aside from financial statements, you must also report your accrued and paid foreign taxes.
You can claim any foreign tax credit (FTC) to reduce your US tax liability if you qualify.
What’s the Due Date Of Form 8858?
Form 8858 is due on April 15th (April 18, 2023), like your federal tax return.
However, suppose you’re a US taxpayer living or operating a business in a foreign country. In that case, you’ll receive an automatic two-month filing extension, which moves your due date to June 15th.
It’s important to note that this extension applies to your federal tax return and Form 8858.
But wait, there’s more! If you still need more time to file, you can request a further extension until October.
Just file your extension request by June 15th to avoid penalties.
If you file your income tax return late, you’ll also be late filing Form 8858, which could result in penalties.
So, filing everything on time is best to avoid any unwanted consequences.
What is The Penalty for Filing 8858 Late?
You may face IRS both civil and criminal penalties if you fail to submit Form 8858 with your income tax return on time.
The IRS requires individuals to file Form 8858 in certain situations.
If you fail to file this form, the IRS may send you a failure to file letter and impose a penalty of $10,000 for each annual accounting period.
To avoid further penalties, you must submit Form 8858 within 90 days of receiving the failure to file letter.
If you don’t submit the form within this time, the IRS may charge you additional penalties of $10,000 for every additional month that the form is late.
Failing to submit Form 8858 can also impact your tax return. The IRS may reduce the foreign taxes you can use to apply as a foreign tax credit by 10%, which could eliminate your tax return or result in a tax bill.
If you still don’t submit the form after 90 days, you could face additional monthly credit reductions of 5%.
Not submitting Form 8858 could result in civil and criminal penalties from the IRS. These penalties may include additional fines or even prison time.
Form 8858 is necessary for US taxpayers who own foreign disregarded entities. It informs the IRS about your foreign business income and helps ensure compliance with US tax laws.
Filing this form requires specific information about your entity, its income, expenses, and related parties. It’s important to file this form promptly to avoid penalties, which can be significant.
Suppose you’re unsure whether to file Form 8858 or have questions about the filing process. In that case, it’s best to consult a qualified tax professional who can guide you through the process and help ensure compliance with all tax obligations.