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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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How to fill out Form 8804 with two foreign partners?

Customer Question

I have been doing an LLC tax return that has two foreign partners who received their tax IDs earlier this year, after two years of back and forth with IRS.

The LLC has only one type of income, rental real estate income. The annual net income after depreciation is about $210,000 for the partnership. Each partner’s tax liability for their share, $105,000, is about $20,000.

I just realized that the partnership must file form 8804, 8805 and 8813.

Q1- When I complete form 8804-W, I am assuming the ECTI is $210,000, the quarterly tax liability is $20,790 based on 39.6% tax bracket. Thus, the annual tax withholding for each partner is over $40,000 which is twice that of the tax liability on their 1040NR. This doesn't make sense. Does that mean the partnership has withhold $40K on behalf of each partner, and then the partners have to claim the refund on their individual tax return?

Q2- Is it correct to say that the partnership has to file for 8813 on a quarterly basis along with form 8804-W and send the payment to IRS, and then annually file form 8804 and for 8805?

Submitted: 3 years ago.
Category: Tax
Expert:  Robin D. replied 3 years ago.

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.
Normally yes, you would withhold the higher amount and the partners would file and claim the refund. The partnership may reduce the foreign partner’s share of the partnership’s gross effectively connected income by certain partner level deductions and losses if the foreign partner certifies these losses on Form 8804-C. You stated you looked at the instructions. A foreign partner may submit a Form 8804-C to a partnership at any time during the partnership's year and prior to the partnership's filing of its Form 8804.
Here is a link to the 8804-C
http://www.irs.gov/pub/irs-pdf/f8804c.pdf
The partnership may reduce the foreign partner's share of partnership gross effectively connected income by the amount reasonably expected to be available and claimed on the partner's U.S. income tax return.

Here are the Instructions for the 8804-C
http://www.irs.gov/pub/irs-pdf/i8804c.pdf
By doing this you will not have to withhold the higher amount.
Use Form 8813, Partnership Withholding Tax Payment Voucher (Section 1446), to pay quarterly installments of withholding tax. The submission of a payment on Form 8813 does not totally satisfy the partnership's responsibility for filing. In addition, the partnership must file Form 8804 with the IRS and Form 8805 with the IRS and the foreign partner after the end of the partnership's calendar or fiscal year.

I am not sure of your experience level in this area – but I would suggest you let your tax professional handle this at least for the first year. It is very important that all documentation is handled exactly.

Customer:

I am a CPA but don't normally deal with foreign partners. I read your response a few times, but I found it to be more generic than specific. In the case of this LLC, the net income is $210,000 after depreciation expense, ($105,000) per partner. The foreign partners do NOT have any other business activities in USA. Once i prepared their 2011 1040NR, they each paid $20,000 in federal taxes.

Q1 – is my ECTI $210K? Once I complete the Form 8804-W, it shows tax liabilities of $83,160 for both partners which is almost twice that of their liabilities since it is based on 39.6% tax rate. This means that each partner would have more than $20K refund each year, basically floating $20k to IRS interest free every year. This doesn’t make sense.

Q3 – I had reviewed for 8804-C, I can’t find which box or line needs to be checked to notify the partnership not withhold more than $40K on behalf of each partner.

Q4 – Once the quarterly 8813 forms are filed, I am supposed to file Form 8804 along with 8805. However, none of the lines on Form 8804 make any reference to Form 8813. What I mean is that Form 8804 calculates the tax liabilities much the same way as Form 8804-W, but it does not have a line asking how much has already been made the Form 8813.

I greatly appreciate your specific response.

Robin D: Q1- You can reduce this by the state and local income taxes the partnership withholds and pays on behalf of the partner on current year effectively connected taxable income allocated to the partner.
So the amount withheld and paid for them will reduce the ECTI that is attributable to each. If the 8804-C is used the amount of true tax liability will be more in keeping with the actual amount withheld.
You are going to have attachments to the 8813 if you reduce the withholding for the partners by using the 8804-C.
When you complete the 8805 you will see that line 10 speaks to the reduction in ECTI.
Line 6 of the 8804 is where you enter tax withheld. Each area of IRC for withholding is shown and based on the specific IRC then the line 6 a-e is used.