QUESTION: My foreign-owned Alabama LLC sells products on Amazon and eBay through both FBA and FBM. We have a hired manager in Alabama who receives a share of sales (not a salary) and opens a company bank account. Amazon issued us a 1099-K.
I need guidance on:
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What taxes are we required to file as foreign LLC owners?
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Can we legally avoid any taxes on our LLC income?
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Are there specific tax considerations for manager compensation and FBA/FBM sales?
Additional Information:
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Manager compensation is a share of sales, not a salary.
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We have a company bank account in Alabama.
Please provide clear and up-to-date information to help us navigate the complex tax landscape for foreign-owned LLCs selling on Amazon and eBay.
EXPERT’S RESPONSE: I understand you have a complex tax situation as a foreign-owned Alabama LLC selling products on Amazon and eBay through FBA and FBM, with a hired manager compensated through a share of sales and a company bank account in Alabama. I’ll break down your tax considerations and guide you towards informed decision-making:
Federal Tax Obligations and Considerations:
1. LLC Tax Classification: Depending on whether your LLC is a single-member or a multi-member entity, different tax filing requirements apply.
Type of LLC: The tax requirements differ based on whether your LLC is a single-member or a multiple-member entity.
1. U.S. Federal Tax Obligations:
- Single-Member LLC: If your LLC is a single-member entity, it’s considered a disregarded entity for tax purposes. However, as a foreign-owned U.S. SMLLC, you are required to file a proforma Form 1120 with Form 5472 to report related party transactions.
- Multiple-Member LLC: In the case of a multiple-member LLC, an informational return Form 1065, along with Schedules K-1, K-2, and K-3, must be filed. These forms report the type of income and expenses flowing to each partner.
2. Tax Liability and Avoidance: Your LLC’s tax liability in the U.S. hinges on whether its activities constitute a U.S. Trade or Business (USTB) leading to Effectively Connected Income (ECI). Generally, if your LLC lacks a physical presence, employees, or dependent agents in the U.S., and doesn’t conduct significant business activities in the country, it might not be subject to U.S. federal taxes. However, nuances in tax law and the specifics of your operations can alter this general rule.
3. FDAP Income: If your LLC earns Fixed, Determinable, Annual, or Periodical (FDAP) income and appropriate withholding wasn’t done, individual members may need to file Form 1040NR.
4. Manager Compensation: The manager’s compensation being a share of sales, rather than a salary, doesn’t automatically exempt it from taxation. The IRS scrutinizes such arrangements, and if the manager acts more like an employee or dependent agent, their activities could trigger USTB and ECI for the LLC, subjecting you to federal income tax. The nature of your manager’s role (independent contractor or employee) significantly affects tax obligations. The IRS focuses on substance over form in these determinations.
State Tax Considerations:
- Sales Tax: As an entity operating in Alabama, you might need to register for, collect, and remit sales tax. The specifics depend on your business activities and the nature of your transactions.
- State Income and Franchise Taxes: Your level of business activity in Alabama may also subject you to state income and franchise tax requirements.
Summary and Next Steps:
- Federal Taxes: Understand the implications based on your LLC structure and ECI/USTB considerations.
- State Taxes: Assess state-specific tax obligations including sales, franchise, and income taxes.
- Manager Compensation: Clarify the status and tax implications of your manager’s compensation.
- FBA/FBM Considerations: Understand how these models affect your tax nexus and obligations.
- Legal Tax Mitigation: Explore strategies under professional guidance to ensure compliance.
We at O&G Accounting are committed to providing comprehensive tax solutions tailored to your business needs. Schedule a consultation with us to navigate these complex tax landscapes effectively.
