QUESTION: As a Canadian couple operating an Amazon business with FBA in both the US and Canada using a Canadian corporation, which US entity structure (C Corp, LLC) would be optimal for minimizing our overall tax burden and maximizing foreign tax credit utilization in Canada?
EXPERT’S RESPONSE: As Canadians operating a Canadian corporation, choosing the right US entity structure for your FBA sales is crucial for minimizing taxes and maximizing your foreign tax credit back home. Let’s unpack C Corporations and LLCs to see which fits your Amazon adventure best.
US Tax for Canadian LLCs:
Breathe easy, Canadian friends! If your LLC operates solely online, without a physical presence in the US (like an office, employees, or exclusive independent agents, etc.), you generally won’t owe US taxes on your Amazon FBA income. That’s right, your profits flow back to Canada, where they’re taxed under Canadian corporate rates.
But hold on! Filing requirements still exist. You’ll need to submit Proforma 1120 and 5472 to inform the IRS about your LLC’s reportable or related party transactions– even though you won’t owe taxes.
Example: Imagine your Canadian corporation owns a US LLC selling kitchen gadgets on Amazon FBA. All orders are shipped directly from Amazon’s US warehouses, and you manage everything online from Canada. In this scenario, you wouldn’t owe US taxes on your Amazon profits – as long as the LLC operates solely online, without a physical presence in the US (like an office, employees, or exclusive independent agents, etc.).
US Tax for Canadian C Corporations:
C Corporations are treated as separate entities from their owners, meaning they pay US corporate taxes on their profits. However, any dividends paid out to you (as the Canadian corporation owner) are generally subject to withholding tax in the US. This means a chunk of your dividend distributions gets taken before reaching your Canadian corporation.
Example: Let’s say your Canadian corporation owns a US C Corporation selling clothing on Amazon FBA. The C Corporation makes a $100,000 profit, but after paying US corporate taxes, it’s left with $70,000. If you decide to distribute this profit as dividends to your Canadian corporation, you will face US withholding taxes on that $70,000, reducing the amount you actually receive in Canada.
So, C Corp or LLC?
For Canadian Amazon FBA sellers, an LLC generally offers a simpler tax path. You avoid US taxes as long as the income is not US source FDAP or ECI. However, Canada recognizes U.S. LLC as a corporation for tax purposes. Income from an LLC can be taxed under Canadian corporate rates – because the LLC essentially may have a fixed or permanent place of operation in Canada.
The Corporate Transparency Act: Foreign-owned U.S LLCs or Corporations must also be aware of the Corporate Transparency Act (CTA), which establishes uniform beneficial ownership information reporting requirements for certain corporations, limited liability companies, and other similar entities created or registered to do business in the U.S. The CTA is part of the Anti-Money Laundering Act of 2020 and aims to prevent criminals, terrorists, and corrupt individuals from hiding illicit money or property in the U.S.
For reporting companies created or registered before January 1, 2024, the initial beneficial ownership information report must be filed by January 1, 2025. If your company is created or registered on or after January 1, 2024, you have 90 days to file the initial report starting January 1, 2024.Learn more and seek guidance here.
O&G Tax & Accounting: Your US Tax Sherpas
Navigating US tax complexities can feel like scaling Mount Rainier – that’s where O&G Tax & Accounting comes in. We specialize in guiding foreign-owned businesses like yours, offering services like:
- Filing Forms 1120 and 5472 for your LLC.
- Providing ongoing accounting and bookkeeping support.
- Consulting on US tax strategies for cross-border businesses.
Ready to conquer the US tax landscape with confidence? Contact O&G Tax & Accounting today for a scheduled consultation and discover how we can help your Amazon FBA business thrive.
