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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22642
Experience:  Taxes, Immigration, Labor Relations
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Hello, I am a non-resident alien looking to invest in a business

Resolved Question:

Hello, I am a non-resident alien looking to invest in a business venture in the US set up as a Texas LLC. My question is how will distributions made to me by the LLC (K-1 income?) be taxed in the US?
I am a tax resident of Australia with whom the US has a tax treaty. Will I be liable for any withholding tax in the US?
My wife is a US citizen, would it be more effective to invest in her name to avoid having to pay withholding tax?
Thank you
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!


A Limited Liability Company (LLC) is a business structure allowed by state statute. Owners of an LLC are called members. Most states also permit “single-member” LLCs, those having only one owner.
Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”).


An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.

LEV :

That means - the LLC doesn't file its own income tax return - but all income and expenses are reported on owner's individual tax return. Disregarded - means - it is ignored as a separate taxing entity - and all income and deductions are reported on owner's individual tax return.

LEV :

If you are a nonresident alien - you are taxed ONLY on income from US sources. Thus - if you do not have any income from US sources - there is no tax liability. Thus - if you do not have any income from US sources - there is no tax liability - and you are not required to file US federal tax return. Your tax liability in your home country or your country of residence - is a separate issue - and is based on local laws.

LEV :

There are some complex rules to determine the source of income. You may take a look - page 12 IRS publication 519 - http://www.irs.gov/pub/irs-pdf/p519.pdf - Table 2-1. Summary of Source Rules for Income of Nonresident Aliens.
If that is income from US sources - it will be taxable in the US and will be subject of withholding. The purpose of withholding - to cover your possible tax liability. Your tax liability is determined when you prepare your tax return - and if overpaid - you will be entitled for a refund.

LEV :

Your spouse - as an US citizen are required to report all her worldwide income regardless of its source. Thus if she will be an owner of the LLC - all her income will be taxable. You are correct - there will not be mandatory withholding - but there will be tax liability at the tax time.

Customer:

Thanks, XXXXX XXXXX income will be sourced 100% from the US so would the LLC (which has many members so not a single member LLC) be deducing WHT at the time the distribution is paid to me? If so what is the WHT rate on this income?

Customer:

Presumably if my wife, a US citizen were to own the interest in the LLC she would not have to pay WHT but would still be liable for income tax in the US so assuming we were in the same tax bracket no net gain but without the hassle of having to apply for a foreign tax credit to recoup the WHT like I would have to?

LEV :

Multi member LLC is treated as a partnership (unless you specifically selected to treat it as a corporation) - which is a pass through entity - the partnership doesn't pay income taxes - instead all tax liability is passed to partners. Distributions to nonresident aliens are subject of mandatory withholding. As a foreign partner you are classified as being directly engaged in the same trade or business for U.S. federal tax purposes. The withholding tax rate on ECTI allocable to a foreign partner is currently 35% on net ordinary income; 28% on gains for non-corporate partners;

LEV :

Your wife - as US citizen is not subject of mandatory withholding - and may provide a signed form W8 to the partnership. Her income will be reported on K1 and included into her other taxable income. Depending of her tax liability - she might need to pay estimate quarterly taxes instead of withholding.

LEV :

Sorry for typo - your wife as an US person - need to provide form W9, but you as a nonresident alien should use form W8ECI.

LEV :

A foreign partner that meets certain requirements may be eligible to certify to the partnership certain of the partner’s deductions or losses or that its interest in the partnership is the only activity that gives rise to effectively connected income. The partnership may consider this certification to reduce or eliminate the partnership's 1446 tax on the partner's allocable share of ECTI from the partnership. Form 8804-C is used by a foreign partner who chooses to provide to a partnership a certification under regulations section 1.1446-6. Refer to Form 8804-C Instructions for more information - http://www.irs.gov/instructions/i8804c/ch01.html

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22642
Experience: Taxes, Immigration, Labor Relations
Lev and 2 other Tax Specialists are ready to help you

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