Do you own any part of a Foreign Disregarded Entity?

If your answer is yes, you have a minimum requirement to file Form 8858. The amount of your involvement is a deciding factor for the requirement of filing additional forms such as Schedules C, H and M, to list a few. Form 8858 is a common form missed by many taxpayers year after year and can be a very costly mistake.

What is a foreign disregarded entity (FDE)? An FDE can be best defined as a foreign entity for which the owner and the entity are viewed as one in the same through the eyes of the IRS. For example a sole proprietorship owned by a U.S. taxpayer. An owner of a foreign business whom is not taxed separately as a corporation by the U.S. may be treated as a foreign disregarded entity. A foreign disregarded entity and its owner are treated as a single entity for tax purposes.  

The benefits of a foreign disregarded entity are the foreign tax credits that can be claimed on the FDE reducing the U.S. tax liability. The tax credits assist to reduce the tax liability at the personal level for the FDE’s owner. This is a great benefit for FDE’s in countries with a higher business tax rate than in the U.S.   

Form 8858 is filed with the U.S. filer’s U.S. federal income tax return and can be extended with the personal return. The IRS requires taxpayer’s to file a disclosure return detailing information related to the disregarded entity. The return requires the FDE’s financials in both the foreign currency & U.S. dollars as well as any transaction made between the taxpayer and the foreign disregarded entity.  

Penalties for failure to timely file can be extreme. A $10,000 penalty may arise for failure to file, or for an inaccurate Form 8858. For more information, please contact Sol Schwartz & Associates P.C.

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