Questions
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Taxation of Foreign Source Profit for U.S. Citizens in a General Partnership: As a foreign individual exploring partnership opportunities in the U.S., how does the IRS tax foreign source income for U.S. citizens involved in a general partnership? Specifically, if one partner is a U.S. citizen and the other is a foreign national, how is the U.S. citizen’s share of foreign source profit taxed?
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Tax Implications for Foreign Partners in a U.S.-Based General Partnership: What are the tax implications for a foreign national partner in a general partnership based in the U.S. that earns income from foreign sources? Does the U.S. tax their share of the partnership’s foreign source income, and under what conditions?
Experts Answers:
Below, we refine and expand upon the expert insights, focusing on the U.S. taxation of foreign source income for general partnerships and individual owners, with specific attention to U.S. citizens and foreign nationals involved in such partnerships.
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Taxation of Foreign Source Profit for U.S. Citizens in a General Partnership
When a U.S. citizen is involved in a general partnership that earns profit from foreign sources, the IRS taxes this income globally. This means that all income of a U.S. citizen, regardless of where it is earned, is subject to U.S. tax. The tax treatment is determined based on the individual’s share of the income from the partnership.
For example, in the case of ACME GP, a general partnership that earned $500,000 in foreign source profit during the current year, if the partnership consists of two individual owners, John (a U.S. citizen) and Jane (a citizen and resident of Ghana), the United States has jurisdiction to tax John’s share of the profit. Assuming a 50/50 profit share agreement between John and Jane, John’s $250,000 share of the foreign source profit would be subject to U.S. taxation in accordance with U.S. tax laws governing global income for U.S. citizens.
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Tax Implications for Foreign Partners in a U.S.-Based General Partnership
For foreign national partners in a U.S.-based general partnership that earns income from foreign sources, the U.S. tax implications are generally limited to the income effectively connected with a U.S. trade or business. Income from foreign sources not effectively connected with a U.S. trade or business is typically not subject to U.S. taxation for a foreign national.
In the context of ACME GP, since Jane’s citizenship and residency are in Ghana, and assuming her share of the partnership’s profit is not effectively connected with a U.S. trade or business, her share of the foreign source income ($250,000) would not be subject to U.S. taxation. Foreign nationals must determine the extent of their activities and the nature of their income in relation to U.S. tax obligations.
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