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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22838
Experience:  Taxes, Immigration, Labor Relations
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A foreign national (no tax treaty) individual thinking about

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A foreign national (no tax treaty) individual thinking about forming a single member LLC in Wyoming, USA to operate a dropshipping business. (From US suppliers to US customers)

How does the tax return work in this case?

Can you also explain briefly about the cashflow?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
A single member LLC is a disregarded entity - means all income and business expenses are reported on the owner's tax return as if there is no LLC.
A foreign national individual is treated as either resident alien or a nonresident alien for US tax purposes. Resident aliens are taxed on all worldwide income the same way as other US persons. Nonresident aliens are taxed ONLY on income from US sources. There are relatively complex rules for determining US source income that apply to nonresident aliens.

LEV :

Specifically for Business income following are used:
Personal services - where services performed
Sale of inventory—purchased - where sold
Sale of inventory—produced - allocation between where produced and where sold.

Customer:

Thanks, XXXXX XXXXX a nonresident alien residing outside of the US and will be operate outside of the US as well

Customer:

Is my dropshipping business profit considered US source income or not?

LEV :

A nonresident alien's income that is subject to U.S. income tax must be divided into two categories:


1.Income that is effectively connected with a trade or business in the United States, and


2.Income that is not effectively connected with a trade or business in the United States.


The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate.

LEV :

Is my dropshipping business profit considered US source income or not?
Sale of inventory—purchased - where sold - so if sold in the US - it will be income from US sources.

Customer:

So I guess my income will be considered as effectively connected with a trade or business in the US

Customer:

By taxing at graduated rates you mean different brackets right?

LEV :

That is correct - you will file US tax return as a nonresident - form 1040NR.
For tax rate schedule - see last page in this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf

Customer:

Thanks Lev, so assuming I form a single member LLC in Wyoming. There is nothing for me to file for the LLC each year?

Customer:

And if that's true, is it safe to say the only thing I need to file each year is the 1040NR ?

LEV :

That is correct - a single member LLC is disregarded entity - it doesn't file income tax return.
While a single member LLC might need to file other tax returns depending on circumstances - employment tax return, sales tax return, etc.
But considering your situation - all business income is passed to the owner.

Customer:

How come my situation is not subject to file "sales tax return"

LEV :

Sales are subject of sales tax based on the location of the facility. In most situations - the dropshipping affiliate will take care of charging customers and sales taxes.

Customer:

From what I know, I don't charge my customer tax at all unless my customer are located in Wyoming. Is that correct?

LEV :

That is correct - businesses are required to register and charge and remit to taxing authorities - if they have a nexus in the state.
In your case - for sales to customers in Wyoming - you woudl be required to charge sales tax.

LEV :

Locations of dropshipping warehouses will also considered as having a nexus.

Customer:

Then if I start to collect the sales tax in Wyoming, I would need to file sales tax return for my LLC?

LEV :

In order to correct sales taxes - you would be required to register first - and then - remit collected sales taxes and file sales tax returns.

LEV :

You will find additional information and details here - http://revenue.wyo.gov/Excise-Tax-Division

Customer:

Okay, going back to "allowable deductions" you mentioned earlier, is there a chart or anything I can refer to to deduct on my personal income (1040NR)

LEV :

First of all - because that is your business - you need to file schedule C and will be able to deduct your qualified business expenses - www.irs.gov/pub/irs-pdf/f1040sc.pdf
You will be taxed on net business income.

LEV :

Fro qualified business deductions - see IRS publication 535 - www.irs.gov/pub/irs-pdf/p535.pdf

Customer:

If I file schedule C in wyoming, and be taxed on net business income. Once the profit pass through to me, I have to pay the tax again?

LEV :

Schedule C is not a separate filing - that schedule is attached to form 1040NR. Your net business income is calculated on schedule C and transferred to form 1040NR. Your tax liability is calculated on form 1040NR.
There is no taxes "again"

Customer:

I see, thanks! So after all the tax return, I should be free to transfer the profit overseas right?

LEV :

That is correct - all income is yours - there might be withholding because payments are to nonresident aliens. Withholding will be credited toward your tax liability on the tax return - so you might have a refund.

Customer:

So I was looking up on the details of LLC in Wyoming, one of the benefit is that there is no State tax. How does that implicate my business?

LEV :

That is correct - there is no state income tax in Wyoming.
But that doesn't mean there is no tax at all. There are still federal income taxes and other tax types.

Customer:

So to sum it up, once I form the Wyoming LLC. All I need to do each year is to file 1040NR along with Schedule C

LEV :

That is correct - federal tax income tax return.

Customer:

This is more of a side question, and I am just asking for your personal recommendation. If I am doing this business with a family member and both of us are non-resident alien. Do you think we should both be the members of the LLC or do you think it is actually a lot easier to file as Single member and is worthwhile to save the hassel?

LEV :

If you form an LLC with several members - it is treated as a partnership for income tax purposes - and should file partnership tax return - that will be additional overhead.


A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return. Some additional information about partnerships may be found in IRS Publication 541 -http://www.irs.gov/publications/p541/index.html


All business income and expenses are reported on the partnership tax return form 1065 - http://www.irs.gov/pub/irs-pdf/f1065.pdf


Partnership should issue schedules K-1 to each partner reporting pro-rata share of net taxable income - http://www.irs.gov/pub/irs-pdf/f1065sk1.pdf
So - income tax liability is passed to partners.

Customer:

So lets say we decided to form an LLC with several members. What we do each year is fil form 1065 along with schedules K-1. and then on the personal income part, we do 1040NR individually WITHOUT the schedule C. Is that correct?

LEV :

That is correct. Moreover - the partnership may withhold taxes from nonresident alien partners - and remit to the IRS - so you would not need to file individual tax returns assuming there is no other income from US sources.

Customer:

That seems a lot easier actually. Seems like LLC with several members and file 1065 along with K-1 witholding taxes is the best way...

LEV :

There is no "best way" - all depends on your individual circumstances. But if you run a business with another person - that is a partnership - and you do not have a choice.

Customer:

So if the LLC withhold the taxes from nonresident alien partner, then the members do not need to file anything else at all right? (Knowing there is no other income from US sources)

Customer:

Thanks a lot! I think I got all of my questions answered.

Customer:

Before I let you go, just one last question. Can you recommend any online filing service for forming LLC?

Customer:

You are amazing

LEV :

Services for forming an LLC are not expensive - and there are no difference - however - there might be additional services you might be interested - for instance - opening a bank account, etc.
Otherwise - there is no preferences and you generally may register the LLC directly by yourself.

Customer:

Okay! Awesome. Thanks for your time:D

LEV :

You are welcome.

Customer:

Oh! By the way, how much is the cost of hiring a accountant to file for LLC each year

Customer:

just a rough figure on average

Customer:

One last question I promise. As far as tax deduction go, would I be eligible to deduct home office supplies even I am outside of the US? Or those deduction only applies to people who reside in the US

LEV :

You do not need an accountant - I assume that you will keep track of all your business transactions by yourself. You might only need a tax preparer at the tax time.
The cost might vary between $200 and $1000 depending on complicity of your tax return.

Customer:

That's good to know, thanks!

LEV :

You may deduct home office expenses - same requirements - deductions are not limited to the US location. However if you run business outside the US - that should be according to local tax laws.

Customer:

Okay thanks ALOT Lev!

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22838
Experience: Taxes, Immigration, Labor Relations
Lev and 3 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

Just going through this article "http://www.irs.gov/Individuals/International-Taxpayers/Partnership-Withholding"


 


What does IRS mean by "A foreign partner is required to file a U.S. income tax return even if there is no U.S. tax due. A valid Taxpayer Identification Number (TIN) is required."


 


I thought if the partnership LLC withhold the tax then there is nothing to file...

Expert:  Lev replied 1 year ago.
Withholding is required in case of a foreign partner and reported on the form 8805 - http://www.irs.gov/pub/irs-pdf/f8805.pdf
In most situations that withholding is more than the tax liability. In order for a foreign partner to claim a refund a valid Taxpayer Identification Number (TIN) is required. The withholding tax rate on a partner's share of effectively connected income is 39.6% for noncorporate partners.
Foreign partners must attach Form 8805 to their U.S. income tax returns to claim a credit for their share of the IRC section 1446 tax withheld by the partnership.
So - that would be in your interest to file the tax return.
Customer: replied 1 year ago.

So when I file for the LLC, I need to file:



1065 Partnership tax return with Schedule attached K-1 / each partner


along with 8805


 


3 forms in total?


 


---------------------------------------------------------------------------------------------------


And then when I file for personal income, 1040NR, I need to attached 8805 as well?


 


2 forms?


 


Because I thought you mentioned if I withhold it at LLC level, I might not need to file anything at personal level.


---------------------------------------------------------------------------------------------------


 


Sorry I am a bit confused at this point. Would you please summarize what are the forms required to file for my LLC(2 NR alien members) each year as well as on the individual side.

Expert:  Lev replied 1 year ago.

So when I file for the LLC, I need to file:

1065 Partnership tax return with Schedule attached K-1 / each partner

along with 8805 - 3 forms in total?

There are might be other attached forms depending on your situation.

 

And then when I file for personal income, 1040NR, I need to attached 8805 as well? 2 forms?

Similarly - there might be other additional forms based on individual circumstances.


Because I thought you mentioned if I withhold it at LLC level, I might not need to file anything at personal level.

That is your choice - but in this case - you will pay larger tax withholding. Individual tax return would be needed to claim a refund.

Customer: replied 1 year ago.

Thanks for the answer.


 


Assuming I am starting a single member LLC, when doing the tax return. Do I simply file 1040NR + Schedule C and pay tax using 1040ES NR?


 


I am confused about the W-8, and wondering if W-8 apply in my case if I am already filing and paying tax using 1040ES NR.

Expert:  Lev replied 1 year ago.

Assuming I am starting a single member LLC, when doing the tax return. Do I simply file 1040NR + Schedule C and pay tax using 1040ES NR?
That is correct. A single member LLC is a disregarded entity (unless you specifically choose it to be treated as a corporation).
As a disregarded entity - it is ignored for income tax purposes - as if the LLC doesn't exists.
The owner should report income and expenses on his/her tax return. In case that is business activity - income and expenses are reported on schedule C.

I am confused about the W-8, and wondering if W-8 apply in my case if I am already filing and paying tax using 1040ES NR.
W8 forms are not sent to the IRS. These forms are provided to payers. If in the course of your business activities - someone pays you - the payer generally must withhold taxes out of the payment and remit that amount to the IRS. On form W8 you would provide your tax ID - so the amount withheld could be properly credited to your account.

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