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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22655
Experience:  Taxes, Immigration, Labor Relations
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Hello Robin, I hope you are doing fine. After our discussion

Resolved Question:

Hello Robin,

I hope you are doing fine.

After our discussion last year. I registered a single member LLC in Delaware in December 2012. Here is the recap from last year.

I am a non resident alien. I am a Pakistani national and resident. I have an online business with clients in North America. When I registered this LLC I thoroughly studied tax obligations on me. But I want to reconfirm that my understanding of the taxes is correct.

Here is what I concluded:

State Taxes: I have to pay annual state tax of Delaware which is $250. I have already paid for this year - 2013.

Federal Taxes: We don't have any operations in the US. We have our website and we deal with our clients from our Pakistan office and all the services are produced and delivered from Pakistan. Since it is a single member LLC and Pakistan and US has a double tax aversion treaty so we are liable to pay all the taxes in Pakistan and not in the US.

Questions:

1.) Please confirm that my understanding of US tax system is correct and we don't have to pay any federal taxes in the US.

2.) What is the procedure for filling annual tax return with IRS and how and when do we file return?

3.) I have a bank account for this business in New York in Chase bank. I also have another account in chase bank in my personal capacity. I also use my personal account for business transactions. Is it okay or should I stop using my personal account for business transactions?


Please let me know if you have any questions for me.


Regards,
Raheem
Submitted: 1 year ago.
Category: Tax
Expert:  Rachel-Mod replied 1 year ago.

Hello,

I'm Rachel, and I’m a moderator for this topic. I sent your requested professional a message to follow up with you here, when they are back online.

If I can help further, please let me know. Thank you for your continued patience.

Best,

Rachel

Expert:  Lev replied 1 year ago.
Hi Raheem and welcome to Just Answer!
Seems as Robin is not available online - please allow me to assist.
1.
First of all - you are correct that annual state of Delaware doesn't tax the LLC income - and you only need to pay annual fee $250 Alternative Entity Tax - as long as the LLC doesn't conduct any business activity within the state and doesn't sell goods to Delaware customers.
See more information here - http://corp.delaware.gov/paytaxes.shtml
2.
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”).
3.
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.
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.
4.
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.
5.
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.
As we see - the business income for providing personal services is sourced where services are performed - thus, if services are performed in Pakistan - that income is NOT from US sources - it is not subject of US income tax - and you personally as a nonresident alien generally is NOT required to file federal income tax return.

Specifically for your questions:
1.) Please confirm that my understanding of US tax system is correct and we don't have to pay any federal taxes in the US.
Confirmed above.

2.) What is the procedure for filling annual tax return with IRS and how and when do we file return?
You may only need to file US tax return if you have income from US sources or if you have withholding from payments and want to claim a refund.
Nonresident aliens are filing from 1040NR - www.irs.gov/pub/irs-pdf/f1040nr.pdf

3.) I have a bank account for this business in New York in Chase bank. I also have another account in chase bank in my personal capacity. I also use my personal account for business transactions. Is it okay or should I stop using my personal account for business transactions?
You may have any bank account - personal or business - and any may be used for business transactions - that is up to you - and there is no limitations.

Let me know if you need any clarification or help with other tax related issues.
Customer: replied 1 year ago.
Thank you for your answer. I am really impressed with your response. Robin mentioned in his answer last year that we will need to file a US return and then claim exclusion under Treaty Article XI. Please find Robin's answer below. As per your answer, we are not required to file anything with IRS. Please confirm.

Thanks

Robin's Answer:

11/29/12 10:58 PM
(2) An individual, who is a resident of Pakistan, shall be exempt from United States tax on
profits or remuneration in respect of personal (including professional) services performed within
the United States in any taxable year if-
(a) he is present within the United States on a temporary visit for a period or
periods not exceeding in the aggregate 183 days during that year, and
(b) the services are performed for or on behalf of a resident of Pakistan, and
(c) the profits or remuneration are subject to Pakistan tax.
11/29/12 10:59 PM
The above is under Article XI of the tax treaty so you would have to file a US return but then you would claim exclusion under Treaty Article XI as long as you are not in the US.
Expert:  Lev replied 1 year ago.
The response given by Robin is correct and you definitely may claim tax treaty provisions. However - that will make sense only if your income would be subject of US taxes.
If your income is NOT subject of US taxes - there is no reason to file the US tax return and there is no need to claim exemption.

As I mentioned above - 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 and you are not required to file US federal tax return.
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.
As we see - the business income for providing personal services is sourced where services are performed - thus, if services are performed in Pakistan - that income is NOT from US sources - it is not subject of US income tax - and you personally as a nonresident alien generally is NOT required to file federal income tax return.
The situation would be different if you sell goods to US customers - in this case - income would be taxable in the US
However - as you mentioned - all the services are produced and delivered from Pakistan - thus income would be sources from Pakistan and not taxable in the US regardless of tax treaty provisions.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22655
Experience: Taxes, Immigration, Labor Relations
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