What is a foreign-owned U.S. disregarded entity and what are the U.S. tax filing requirements?

In the United States a disregarded entity is an entity that is not viewed by the Internal Revenue Service (IRS) as an entity separate from its owner.  That means it files no separate tax return. A limited liability company (LLC) with a single owner is  by default a disregarded entity, though the owner can elect for it to be treated as another type of separate entity, for example an S Corporation (that is only available to US citizens or residents) or a C Corporation that is available to everyone.

A single member LLC that is owned by someone who is a nonresident alien of the United States is a foreign-owned disregarded entity. If there is more than one member of the LLC then the LLC would be a partnership by default.

Before 2018 foreign-owned U.S. disregarded entity had no tax filing requirements.  The owner of the LLC would have tax filing requirements in the United States if the income was ETBUS income.  Income is ETBUS if it comes from being engaged in a trade or business in the United States.

Contrary to a common misconception, the simple fact your LLC is a US entity, DOES NOT make the income from it ETBUS income.  If you live in another country, work from another country, and don’t have any employees or property in the United States, your income is probably not ETBUS income.

There are many types of businesses that may operate through a U.S. LLC that do not necessarily generate income that is taxable in the United States.  Examples are Amazon FBA sellers, Shopify store owners,

Starting in 2018 the law changed, and now foreign-owned U.S. disregarded entities must file two forms, the Form 5472 and Form 1120.  These forms are due April 15 of each year but can be extended until October 15 if a Form 7004 is filed before the original due date.  An extension is not valid if it is filed late.

For a corporation, filing a Form 1120 means filing tax if you have income, but for a foreign-owned U.S. disregarded entity in this circumstance it does not.  The Form 1120 for a foreign-owned U.S. disregarded entity only provides basic information on the disregarded entity to the IRS. The Form 5472 provides more detailed information.  The main purpose of the form is to report on any transactions between the owner of the business and the LLC.

Because there is no tax due, you should have no fear of filing these forms.  But the penalties for failing to file them are very harsh. The penalty for failing to file an accurate Form 5472 on time is $25,000. If you are already late, don’t panic or give up on your business, the penalty can be waived but you should take action to file the forms and ask for the penalty to be removed as quickly as possible.

If you need help filing a Form 1120 and Form 5472, we can help.  You can begin by contacting us for a consultation or by filling our new client form for foreign-owned U.S. disregarded entities.

Even if you don’t need our services you can use the form below to sign up for reminders about important due dates for foreign-owned U.S. disregarded entities: