Are you a U.S. nonresident? Do you own a U.S. Limited Liability Company (LLC)? Are you the only owner of the LLC? If so, under new IRS regulations, you may have to file Form 5472 annually with the IRS—even if you do not normally have to file a U.S. tax return.
What changed under the new regulations?
In the past, sole owners of LLCs could simply record the income and expenses of the LLC on their individual tax returns. The LLC was treated as a “disregarded entity,” meaning that it was ignored for income tax purposes, unless taxpayers made an election to treat the LLC as a corporation. No other forms were needed to be filed for the LLC.
Under the new rules, these individual taxpayer LLC owners will continue to report any income and expenses of the LLC directly on their individual income tax returns, but now, for calendar year 2017, the LLC may have to file Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business,” and maintain records for “reportable transactions.”
Why is this change a big deal?
First, this change affects many U.S. nonresidents. Although the change was likely intended to target nonresidents who contribute high-priced real estate to LLCs in order to mask the true ownership of the property, the new reporting requirements affect a broader population. For instance, many nonresidents (including G-4 visa holders) create LLCs for their consulting businesses or to hold rental real estate. Under the new regulations, these nonresidents may also need to file Form 5472.
Second, the penalty for failing to file the Form 5472 is $10,000.
Do all nonresidents with LLCs have to file Form 5472 now?
The new filing requirement generally applies when the LLC has “reportable transactions.” Reportable transactions mostly include financial transactions—of any amount—between the LLC and its owner (or other “related party”). This means that when an owner creates or dissolves an LLC, pays any expenses for the LLC or the property it contains, contributes additional property to the LLC, or partakes in the income of the LLC, then a reportable transaction has occurred.
Therefore, most nonresident LLC owners will have to file this form.
Does this apply immediately?
The new tax filing requirement applies to tax years beginning January 1, 2017. This means that for LLCs with a December 31, 2017 year-end, the first Form 5472 should be filed in early 2018.
One other big hurdle: you will need to apply for an EIN
To file the Form 5472, the LLC must obtain an Employer Identification Number (“EIN”) by completing a Form SS-4. The SS-4 requires responsible party (usually the owner) to submit certain information, including his or her social security number (SSN), individual taxpayer identification number (ITIN), or EIN, as well as the owner’s name.
A nonresident who does not have an ITIN or SSN must apply for an ITIN, which can often take several months. In practice, this means that the LLC should apply for an EIN before the end of 2017 in order to obtain it in plenty of time to file the Form 5472.
If you are a nonresident and are sole owner of an LLC, we recommend that you ascertain whether you may have a Form 5472 filing requirement. If you do, be prepared to take the necessary steps in order to file the form in 2018. If you need assistance in making this determination, please contact our New Client Lead, Fan Chen, 703-652-1737 or at email@example.com.