QUESTION: I am forming a multi-member Florida LLC for selling private label products on Amazon FBA, sourced from China. Our team consists of four members: three non-US residents and one US citizen. My question is: how will this LLC’s tax income be declared, and do the foreign members need individual taxpayer identification numbers (ITINs) to pay their share of the taxes?
EXPERT’S RESPONSE: Income Sourcing and Its Tax Implications
- Income Sourcing Under TCJA and IRC 863(b): Under the Tax Cuts and Jobs Act (TCJA), Section 863(b) specifies that the source of income from sales of taxpayer-produced inventory is determined based on the place of production. This means that income from inventory produced outside the U.S. but sold in the U.S. is considered foreign-sourced. However, this foreign-sourced income might be treated as Effectively Connected Income (ECI) if a U.S. office significantly contributes to generating this income. The determination of ECI is critical as it dictates the extent to which the income is subject to U.S. taxation.
- Physical Presence and ECI: If the foreign partners do not have a physical presence in the US, such as employees, agents, or offices conducting meaningful business, they generally are not subject to US federal taxes. The presence of a US citizen in the partnership does not automatically lead to ECI unless the US citizen is actively involved in business activities within the US.
- Impact of a U.S. Citizen Partner: The presence of a U.S. citizen in your partnership adds complexity. If this partner is active in the U.S., their involvement might result in some or all of the partnership’s income being treated as U.S. trade or business (USTB) and ECI. Conversely, if the U.S. citizen is working outside the U.S. and the partnership lacks significant U.S. presence or business activities, the income may escape U.S. federal tax.
- Filing Form 1065: For an LLC with foreign partners, Form 1065 must be accurately completed and filed by March 15. This includes the necessary K-1, K-2, and K-3 forms, which detail the allocation of income and expenses between US and foreign sources, along with the nature of the income.
- Income and Expense Allocation: You’ll need to determine how to allocate income and expenses between U.S. and foreign sources, considering where the business is conducted and the nature of the income.
- Foreign Tax Credits and Information Reporting: Consider potential foreign tax credits and deductions and comply with international information reporting requirements (Forms 926, 5471, FBAR, 8938, etc.).
- Requirement of ITINs: Foreign partners will need ITINs if the LLC generates Gross ECI or Fixed, Determinable, Annual, or Periodical (FDAP) income without proper withholding at the source. ITINs help in tax withholding and are essential for dealing with the IRS regarding refunds or tax issues.
- Personal Tax Filing for Foreign Partners: If the LLC has ECI or FDAP income, foreign partners must file Form 1040NR using the K-1, K-2, and K-3 forms provided by the partnership. They may also claim any treaty benefits applicable.
- State Tax Obligations: Besides federal taxes, you should also consider state-specific tax obligations, such as sales tax registration, collection, and remittance, as well as potential state franchise and income tax requirements, depending on the level of your business activities in specific states.
At O&G Accounting, we specialize in providing expert advice on international tax matters, especially for businesses like yours with unique structures and global connections. Our team can help you navigate the complexities of U.S. and international tax laws, ensuring your compliance and optimizing your tax position.
We recommend scheduling a consultation to discuss your specific situation in detail. This will allow us to tailor our advice to your unique circumstances, considering the roles of your partners, the nature of your business activities, and the intricate tax regulations applicable to your LLC.
By working with us, you can ensure that your tax reporting is accurate, efficient, and aligned with your business objectives, while also exploring potential tax-saving strategies. Please feel free to reach out to us for a detailed and personalized consultation. We are here to assist you in navigating the complexities of international tax law and to help you make informed decisions for your business.