(IRS) Form 8858 instructions 2017/2018
IRS Form 8858
A foreign disregarded entity is a company that has not been established or organized in the United States of America, which results in a series of consequences, like for instance the tax reporting requirements. What is more, a disregarded entity is not treated as a separate entity from its owner, pursuant to tax regulations.
Any U.S. person, who is the tax owner of the foreign disregarded entity or owns an interest in foreign tax owners of foreign disregarded entities at any time within the annual accounting period or a taxable year of the U.S. person, has to submit the form 8858. The tax owner of the foreign disregarded entity is a person, who is considered as possessing assets or liabilities of such an entity for income tax purposes.
Form 8858 penalties
The form 8858 has to be filed every year and it is due on the same day as the tax return. In case a taxpayer does not file this form, they may have to pay a penalty, and the amounts are not low, since it can be $10,000 for each accounting period for which the form should be submitted by a controlled foreign corporation or controlled foreign partnership. However, the Internal Revenue Service sends a notice to the taxpayers to remind them about the obligation to file the form, but after the expiry of ninety days from mailing the notice, an additional fine in the amount of $10,000 will be imposed for each thirty-day period or its fraction during which the taxpayer delays with the submission of the form. The final penalty is restricted to the amount of $50,000 for each failure to file the form.
If a person does not fill in all data they are obliged to provide on the form by the due date, their foreign taxes available for credit will have to be lowered by 10%. What is more, if the failure to complete all required fields will last longer than ninety days, the foreign taxes available for credit will be lowered by another 5% for every three-month period or its fraction.
The failure to meet the reporting obligations may also result in the criminal penalty. But the taxpayers always have the possibility to file an amended return with the form 8858 attached or submit original returns with the file 8858 enclosed for the outstanding years.
Form 8858 instructions 2017/2018
The Information Return of U.S. Persons with Respect To Foreign Disregarded Entities is quite extensive and requires the provision of quite lot of data from the taxpayer. First, we have to enter the accounting period of the company, for which the form is filed. Then, it is required to provide the name and surname of the person, who is submitting the form, their identifying number, the address details, including number, street, room or suite number, or the number of the post office box. Then the city or town, state and zip code. We also have to enter the date on which the tax year of the filer starts and finishes.
In line 1a, the taxpayer has to provide the name and address of the company that is considered a foreign disregarded entity for tax purposes, then its U.S. identifying number, which can be either a social security number (in the case of individuals) or the employer identification number (in the case of all other entities).
In the next line we are required to provide the Reference ID Number, but only if the filer has not entered the identifying number of a foreign disregarded entity. Later on, we have to give the name of the nation, where the entity was organized and its type, pursuant to the local tax law, the day on which the company was established and its effective date as a foreign disregarded entity. If the entity has claimed benefits in association with its income, pursuant to the treaty concluded between the United States of America and another nation, the treaty and the number of its article that the company relied on when claiming benefits has to be stated. In line 1g, the taxpayer has to enter the name of the country, where the principal business activity is pursued and in 1h a brief explanation, specifying its principal business activity has to be entered, whereas in the line 1i the functional currency of the entity has to be specified.
Now, we can move on to part 2, where we have to give certain information for the accounting period of the disregarded foreign entity, which has been stated in the beginning of the form. First, if the entity has branches or agents within the territory of the United States of America, we have to state the name, identifying number and address of these branches or agents, and then the details of the persons, who take care of the books or records of the entity, as well as the address where they are kept.
In part three, it is necessary to give the details of the tax owner of the foreign disregarded entity, for instance the name and address, the accounting period that the tax return, together with which the form 8858 is filed, covers, the U.S. identifying number, if it has been assigned, and if not, it is required to give the reference ID number. Then the taxpayer has to state the name of the country, under the laws of which it is organized and its functional currency.
If the direct owner of the entity is different from the tax owner, similar data have to be provided as in the part two. In addition, the tax payer has to enclose the organizational chart, which shows the chain of ownership between the foreign disregarded entity and the tax owner, as well as between the foreign disregarded entity and all entities in which it has at least ten percent of indirect or direct interest.
The Schedule C of the Form 8858 constitutes the Income Statement, where we have to enter certain amounts either in U.S. dollars or another functional currency. In order to determine, which currency should be selected by the entity filing the form, the filer has to turn to the section 1.985-1(a-c) and 1.989(a)-1(b) of the Regulations. However, even if the entity’s functional currency is different than U.S. dollars, the filers have to convert the amounts into the American currency, either using the American Generally Accepted Accounting Principles or the average exchange rate determined pursuant to the section 989(b)), and in the case of the latter, we have to tick the box placed on the right.
In the Schedule C, we have to provide the amounts of gross receipts or sales, costs of all goods the entity has sold, then the gross profit, which is the difference between the first and the second value given so far. Then, we have to enter the amount of other income earned in the accounting period and in line five add to the gross profit calculated and given in line four. Later on, we are required to provide total amount of deductions and other adjustments, like for instance the provision for income, excess profit taxes deducted or war profits, and the net income or loss in compliance with the values in the books.
Now we can move forward to the Schedule C-1. The filer has to bear in mind that a person, who is considered an owner of a qualified business unit (i.e. a taxpayer’s separate unit of trade and business, for which separate books and records are kept), arising from the activities of a foreign disregarded entity, may be considered as owning multiple entities. The Schedule C-1 has to be completed for every owner of every qualified business unit arising from the activities of the foreign disregarded entity and enclosed to the Form 8858. In this part of the form, we have to specify the remittances from the foreign disregarded entity, as well as gain or loss of the recipient, in compliance with the Section 987. We also have to answer, whether the remittance from the foreign disregarded entity were treated as made to the direct owner or not, and whether the tax owner changed the accounting method for section 987 during the tax year.
In the Schedule F, the taxpayer has to provide the information on the assets, liabilities and the equity of the owner. Then in Schedule G, the Internal Revenue Service requires from us to answer some questions regarding for instance the interest in any trust or foreign partnership owned by the foreign disregarded entity in the tax year or whether the tax owner claimed loss as a result of the election with regard to debt or stock of a foreign disregarded entity or if it paid or accrued the foreign tax, which was disqualified for credit pursuant to the section 901(m) or to which the section 909 applies.
In Schedule H, we have to enter the current earnings and profits or taxable income of the entity. The values must be provided in the functional currency. The taxpayer has to give the data on the net income or loss, which is recorded in the accounting ledgers, total net amount of additions and subtractions, and calculate the taxable income taking these values into consideration. Then the amount of gain or loss has to be given, if the entity uses the principles of DASTM Accounting, as well as the value of current earnings and profits in the American currency.
Some entities will be also required to attach the Schedule M to the form 8858. This obligation applies to every foreign disregarded entity, whose tax owner is a controlled foreign partnership or a controlled foreign corporation. In this document, the taxpayer has to inform the Internal Revenue Service about the transactions that took place during the annual accounting period of the foreign disregarded entity, and which finished within the tax year of the U.S. person.
The completion of the form 8858 takes quite a while, it usually ranges within seventeen to twenty hours, but the benefits may be high, which is why it is worth to do it.
Form 8858 Example: