Taxation of U.S. Partnerships and Limited Liability Companies
Partnerships are a popular form of business entity because of the numerous advantages. They are easy to establish and maintain as many states do not require a charter or any other formal paperwork to start a partnership. Moreover, the partners have broad flexibility in the proration of income, gains, losses, and deductions of the partnership in addition to the non-taxable treatment of contributions in exchange for a partnership interest.
Another significant advantage is the single layer of taxation of domestic partnership structures. Under the internal revenue laws, income and deductions flow through to the partners and are recognized by them in same form and character as the partnership recognized them. A major drawback is the unlimited liability of the general partners, which is overcome with the establishment of a Limited Liability Company.
Despite the numerous benefits, the tax reporting and withholding requirements applicable to foreign partners in domestic partnerships and Limited Liability Companies are onerous and daunting. Our services cover a broad range of accounting, bookkeeping, and tax compliance requirements definite to
Taxation of Domestic Partnership with Foreign Partners
Any partnership formally organized under the laws of any state is a US domestic entity regardless of the citizenship of the partners. In a similar vein, the partnership remains a fiscally transparent entity under federal law, and an information return on Form 1065 must be filed to report the pro-rata share of income and loss allocable to partners.
However, an important consideration is the statutory tax withholding requirement that applies to partnerships with foreign owners. A domestic partnership is required to withhold tax at source when US source passive income, such as rents, dividends, or royalties is allocable to a foreign partner. A withholding tax of 30% or lower tax treaty rate applies to passive income. Moreover, the partnership must also deduct taxes on a foreign partner's pro-rata share of the partnership's effectively connected income even if there is no actual distribution of cash. The statutory tax rate on effectively connected income is 39.6% for a foreign individual or unincorporated entity and 35% for foreign corporate partners.
The partnership is required to deposit the tax withholding on a quarterly basis. Forms 8804, 8805 and 8813 are used to report and transmit the tax withholding on effectively connected income. Forms 1042, 1042-S and 1042-T are filed for withholding and transmittal of tax on US source passive income. This diversity in reporting and withholding requires exhaustive analysis of the partnership's affairs, and we offer services that explicitly cover
- Preparation and filing of Form 1065, including Schedule K-1 and all other forms and schedules
- Assistance with determination of US FDAP and effectively connected income
- Preparation of withholding statements for non-resident partners, including Form 8805 and 1042-S
- Accounting and bookkeeping services
- Income tax returns for foreign partners in US partnerships
- Application of tax treaties to the partnership affairs
- Tax consultancy and advisory services
Should you wish to register for our partnership tax services, you may do so at any time. Did not find what you were looking for? Ask your questions and get a free quote with more information about how we can assist you further. You may also contact us directly.