Form 5472 + Form 1120-F -- new filing requirements for foreign owners of U.S. LLC
For background - please read my article from July 2017 - Death of the Straw Man - Foreign Owners of U.S. LLC's to Face Additional Reporting Requirements
The IRS established new filing requirements for the foreign owners of U.S. LLC. . For taxable years beginning on or after Jan 1, 2017, foreign owners of U.S. disregarded entities (more on this below) will be required to file Form 5472 along with Form 1120-F informational returns with the IRS
Foreign owned U.S. LLCs (disregarded entities) - treated as domestic corporations for compliance purposes
Some background info --- single owner U.S. LLCs are treated by the IRS as disregarded entities . Unlike corporations, disregarded entities are typically not required to obtain an EIN, nor do they have filing obligations separate from the owner’s regular filing obligations. Until recent changes described herein, if a foreign owner had no U.S. tax filing requirement, the disregarded entity that they owned also had no filing requirement (assuming no U.S. sourced income or business in the U.S.).
Form 5472 isn’t new, but has been modified to include more disclosure
The prior application of Form 5472 was limited to disclosure of natural owners of Foreign-Owned U.S. Corporations; now its use has expanded beyond corporations and covers foreign owners of disregarded entities (LLC).
Form 5472 + 1120-F filing requirement exists, regardless of U.S. tax filing requirement (1040/1040NR)
Foreign owners of U.S. disregarded entities may have no income tax filing requirement (Form 1040/1040NR) if no U.S. sourced income. However, Form 5472 (and Form 1120-F, described below) are required in regardless of that.
In addition to Form 5472, foreign owned U.S. LLC’s will be required to file a pro-forma Form 1120-F with Form 5472 attached. This will cover filing obligations for the LLC and its owner.
However, If the property held in LLC is used for rental activity, then the natural owner (foreign person) will report rental activity on form 1040NR under their personal ITIN. Pro-forma 1120-F + 5472 still has to be filed as well - under the EIN of the LLC.
1120-F + 5472 must be sent to Kentucky by snail mail and cannot be electronically filed (although a fax option is available - not as reliable as mail with delivery confirmation)
Real life example 2 - Real Estate Investor from India with Miami property
Samit Paap, Indian citizen, wants to invest $1MM in a condo in Miami. He prefers not to purchase the property outright to avoid disclosure of his identity in the property ownership. On recommendation from financial advisors, Samit decided to purchase the condo through an LLC. However, starting in 2018 (for 2017), Samit will be subject to additional filing requirements to disclose the identity of the “natural person” in this transaction - himself.
- First, Samit should file Form W-7 to obtain an ITIN.
- Then, Samit can open the LLC, request an EIN number for the LLC and file Form 5742, along with form 1120-F
This begs the question, however, if it is even worthwhile to purchase via the LLC, instead of purchasing outright, as the information disclosed on Form 5472 will defeat the purpose of buying the real property through disregarded entity. The answer will depend on the purpose of the LLC; if the LLC was established for the purpose of asset protection - yes; if the sole purpose of purchase through a foreign LLC is to disguise the “ foreign natural owner” of the property - then it is no longer a worthwhile venture.
Real life example 1 - UK Skier owns condo in Utah
John Smith, UK citizen, owns a ski lodge in Utah registered to a Delaware LLC. John’s house is not used for rental purposes, John spends 3 weeks each winter in Utah skiing. John established the LLC 5 years ago but never had a U.S. tax filing requirement.
Starting in 2018 (for tax year 2017), John must file Form 5472 to “disclose the natural owner” of this property held by the Delaware LLC, along with Form 1120-F.
The existing LLC already had an EIN, therefore John can timely file Forms 5472 and 1120-F (by April 15, 2018). John is not required to file personal US tax return (form 1040NR).
Filing logistics - EIN, ITIN, W-7 Explained
In order to file Form 5472, all applicable entities will require an EIN.
- If this is a new LLC, prior to filing Form 5472 the LLC must obtain EIN by filing Form SS-4
- In order to request an EIN, you must first have an ITIN . In order to request an ITIN - Form W-7 must first be filed.
- Note - one million plus ITINs expire each Dec 31, make sure you renew yours on time.
- TFX can assist you with all of the reporting requirements (Form 5472, SS-4, Form W-7, Form 1120-F) reporting requirements discussed.
Form 1120 is due on April 15th (Form 5472 is filed as an attachment to Form 1120).
Yes - extension may be filed for an additional 6 months via Form 7004. TFX can file this extension for you - request one here
The new reporting requirements go into effect on January 1, 2018 for taxable years beginning on or after Jan. 1, 2017.
Starting in July 2016, U.S. title insurance companies were required to identify the natural persons behind shell companies used to make cash purchases of high-end residential estate in selected metropolitan areas.
Partially cash transactions (Covered Transactions) are reported by the Title Insurance Company by filing Form 8300 to FinCEN, an arm of the Treasury.
Each year, millions of ITINs must be renewed or risk expiration. At the end of 2017, ITINs with middle digits 70, 71, 72, or 80 (For example: 9NN-70-NNNN) need to be renewed if the taxpayer will have a filing requirement in 2018.
Taxpayers who are eligible for, or who have, an SSN should not renew their ITIN, but should notify IRS both of their SSN and previous ITIN, so that their accounts can be merged.
Taxpayers whose ITINs have middle digits 78 or 79 that had already expired and were never renewed should renew their ITIN if they will have a filing requirement in 2018.
To renew an ITIN, taxpayers must complete a Form W-7 and submit all required documentation like with the original application. Although a Form W-7 is usually attached to the tax return, a taxpayer is not required to attach a federal tax return to their ITIN renewal application.
Taxpayers have the option to call and make an appointment at a designated IRS Taxpayer Assistance Center instead of mailing original identification documents to the IRS. When making an appointment, be sure to indicate that this involves an ITIN renewal application