When operating a U.S.-based single-member LLC (SMLLC) as a foreign owner, understanding the tax filing requirements is essential. Forms like IRS pro forma Form 1120 and Form 5472 are critical for compliance, even if your business activities do not result in paying U.S. federal taxes. This guide will walk you through these requirements, with a specific focus on tax obligations in Ohio for out-of-state sellers.
Case Overview: Ramesh’s U.S. LLC Selling Imported Goods
Ramesh, a foreign owner, operates a U.S. SMLLC that imports products from India and sells them through e-commerce platforms and brick-and-mortar stores in the U.S. He seeks guidance on how to file the necessary IRS forms and comply with U.S. and Ohio tax laws.
Key Concepts and Obligations for Foreign-Owned LLCs
1. IRS Pro Forma 1120 and Form 5472:
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- Form 1120 serves as a “pro forma” or placeholder form for foreign-owned SMLLCs, as these entities typically do not pay U.S. federal income taxes.
- Form 5472 is used to report reportable transactions between the LLC and its foreign owners or related parties. This information return allows the IRS to track financial transactions involving related parties.
2. Understanding Part IV of Form 5472:
- Part IV of Form 5472 requests details on monetary transactions between a U.S. corporation and foreign-related parties. This section is intended for U.S. corporations and LLCs taxed as corporations, which are subject to U.S. income taxes.
- For foreign-owned SMLLCs, Part IV is generally not applicable. Instead, focus on Part V of Form 5472, which details reportable transactions between the LLC and its foreign owner or related parties.
3. Foreign Payments and Transactions:
- Ramesh asked whether payments made to his suppliers in India should be reported in Part IV. Since these payments are made directly from the LLCs bank account to a third-party supplier, they do not qualify as related-party transactions and are not reportable in Part IV or Part V of Form 5472.
4. Key Filing Requirements:
- o Ramesh needs to file pro forma Form 1120 and Form 5472 annually by April 15 to avoid penalties, which can be as high as $25,000 for late or incorrect filing.
- o Additionally, maintaining compliance on the state level includes renewing the LLC annually and paying fees to registered agents.
Federal Income Tax Considerations for Foreign-Owned LLCs
1. Federal Tax Implications:
- Ramesh’s LLC imports goods from India and sells them in the U.S., but he has no physical presence in the U.S. (no office, employees, or dependent agents). As such, the income is classified as non-ECI and is not subject to U.S. federal income tax.
- However, Ramesh should consult with a tax advisor in India to determine if the income is taxable under Indian law.
2. Ohio State Tax Implications:
- Ohio requires sellers to collect sales/use tax on sales to Ohio residents. If an out-of-state seller has sufficient contact with Ohio (known as nexus), the seller must comply with Ohio’s tax laws. Nexus can be established through various activities, such as having employees, making regular deliveries, or any other physical presence in Ohio.
- Effective August 1, 2019, Ohio enacted substantial nexus statutes. If a seller has at least 200 transactions or $100,000 or more in gross sales into Ohio, the seller may be required to collect Ohio use tax without a physical presence in the state (Ohio Revised Code 5741.01(I)).
- Voluntary Registration: Even if Ramesh’s business does not meet the nexus criteria, voluntarily registering to collect Ohio tax can be a convenience and service to his customers, who would otherwise need to pay the tax directly to the state or risk formal assessment of taxes, penalties, and interest.
The Role of Fulfillment Centers in Ohio
Ramesh stores his goods at a fulfillment center in Ohio, which has specific state tax implications:
- Physical Nexus: Storing inventory in Ohio creates a physical presence, triggering the obligation to register, collect, and remit use tax in the same manner as an Ohio-based vendor collecting sales tax.
- Economic Nexus: Even without a physical presence, if Ramesh’s sales into Ohio exceed 200 transactions or $100,000 in gross sales, he must comply with Ohio’s use tax laws.
Sales Tax and Thresholds in Ohio
For businesses selling across multiple states, understanding both physical nexus and economic nexus is crucial:
- Physical Nexus: Having a warehouse, inventory, or employees in a state typically triggers the requirement to register for and collect sales/use tax.
- Economic Nexus: As outlined by Ohio’s laws, surpassing the threshold of 200 transactions or $100,000 in sales requires the business to register and collect use tax.
Other Compliance Forms: 1040-NR and Beyond
- Form 1040-NR is used by non-resident aliens to report income subject to U.S. taxation. Based on Ramesh’s activities and lack of physical presence in the U.S., this form is likely not required.
- Ramesh should focus on understanding when state sales tax, franchise tax, or other state-level taxes are triggered as his business expands.
Solutions and Key Takeaways
- Filing Requirements: Ensure timely filing of pro forma Form 1120 and Form 5472 to avoid penalties.
- Sales and Use Tax Registration in Ohio: Given the substantial nexus statutes, Ramesh should monitor his sales and determine when registration is necessary to comply with Ohio’s use tax laws.
- Understand Physical Nexus: Storing products in Ohio or other states can create tax obligations, including the need to collect and remit use tax.
- Monitor Franchise Tax: Be aware of franchise tax requirements in states where inventory is stored or sales are made.
Additional Considerations>
- Sales Thresholds: Regularly review the sales thresholds of states where products are sold to determine when to register for sales/use tax.
- Fulfillment Center Operations: Consider the tax implications of using fulfillment centers and ensure compliance with relevant state tax rules.
- State-Specific Rules: While federal taxes may not apply, state laws vary and could impact tax liability.
For foreign-owned U.S. LLCs, understanding tax compliance is essential to avoid penalties and maintain smooth operations. By filing IRS pro forma 1120 and Form 5472, staying aware of Ohio’s sales/use tax obligations, and ensuring compliance with state tax rules, foreign owners like Ramesh can successfully operate their U.S. businesses.
For personalized guidance on your U.S. LLC’s tax compliance or help with filing IRS forms, book a consultation with O&G Tax and Accounting Services here.
Additionally, don’t forget the Beneficial Ownership Information Reporting (BOIR) requirements under the Corporate Transparency Act, ensuring your business complies with these regulations. We offer CTA filing assistance to help you meet your obligations.
