IRS Issues Final Regulations Governing Foreign-Owned Single Member LLCs

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

In December, the IRS issued final regulations that treat a domestic disregarded entity that is wholly owned by a foreign person as a domestic corporation separate from its owner for purposes of the reporting, record maintenance, and associated compliance requirements that apply to 25-percent foreign-owned domestic corporations under section 6038A of the Internal Revenue Code.  A link to the final regulations is available here.  The new regulations will apply to taxable years of entities beginning on or after January 1, 2017.

Under the check-the-box regulations of § 301.7701, certain entities, such as a U.S. LLC, that have a single owner and are not classified as a corporation, are generally disregarded for federal tax purposes—that is, they are disregarded as separate from their owner.  Such entities, therefore, generally don’t have reporting obligations and don’t need to obtain an EIN.

However, under the new final regulations, a domestic entity that is wholly owned by a foreign person and that is otherwise disregarded under the check-the-box regulations of § 301.7701 is nonetheless recognized (i.e., treated an an entity separate from its owner and classified as a domestic corporation for purposes of section 6038A).  As a result, such entities will be required to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or BusinessIn order to do so, they will now need to obtain an EIN by filing a Form SS-4 disclosing information about the ultimate owner.

The new reporting obligations mark a major change and are, in part, designed to increase transparency and promote the IRS’s ability to share information with the country’s FATCA partners.  Non-compliant taxpayers may face steep penalties.

 

For the reader’s reference, below is the introductory revision to the applicable regulations, which are available here.

§ 1.6038A–1 definitions.

General requirements and

* * * * *
(c) * * *
(1) * * * A domestic business entity that is wholly owned by one foreign person and that is otherwise classified under § 301.7701–3(b)(1)(ii) of this chapter as disregarded as an entity separate from its owner is treated as an entity separate from its owner and classified as a domestic corporation for purposes of section 6038A. See § 301.7701–2(c)(2)(vi) of this chapter.

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