Foreign Owned Disregarded Entities and Form 5472

 

In December 2017 the IRS issued the long awaited instructions to the expanded version of IRS Form 5472 Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.  This tax reporting update highlights some the filing issued that owners/members of limited liability companies will face as the filing deadline approaches.

Historically, Form 5472, has been an often overlooked informational form.  Prior to the 2017 tax year it was generally required only if the “reporting corporation” had a “reportable transaction” with a foreign or domestic related party during its tax year.  The obligation to file this form has been expanded beyond transactions with traditional corporate entities and now also applies to domestic disregarded entities wholly owned by a foreign person (i.e., single member limited liability companies (LLCs).

Prior to January 2017, a reporting corporation was defined as either a 25% foreign-owned U.S. corporation, or a foreign corporation engaged in a trade or business within the United States.  However, under the new regulations the definition of a reporting corporation has been expanded to include domestic disregarded entities (i.e. single member U.S. Limited Liability Companies).  The expanded reporting requirements apply to foreign owned single member limited liability corporations for years beginning after December 31, 2016 and ending on or after December 31, 2017.

The rules applicable to identifying “reportable transactions” are very broad and are designed to highlight activity between the entity and the related foreign owner.

These reportable transactions include but are not limited to the following:

  • Events surrounding the funding or dissolution of the entity.
  • Loans between the entity and the foreign owner.
  • Distributions from the entity.
  • Transactions where there is uncompensated use of property (such as use of an apartment) without an arms-length lease agreement in place.

Form 5472 is due with the corporation’s income tax return, by the due date (including extensions) of the return.  Foreign-owned U.S. disregarded entities are now required to file a pro forma Form 1120 with Form 5472 attached.  The information which must be included on the pro forma Form 1120 is limited to the following items on the first page of the form (1) name of entity; (2) address of entity;(3) entity employer identification number (“EIN”); (4) whether this is the entity’s initial or final return; (5) whether this is a change in name; and (6) whether there is a change in address.  “Foreign-owned U.S. DE” should be written across the top of the Form 1120 with Form 5472 attached.

The rules provide for a penalty for failure to file or filling a substantially incomplete Form 5472 is penalty of $10,000 per occurrence.  Additionally, if the failure continues more than 90 days after notification by the IRS, an additional penalty of $10,000 may apply per occurrence.  This penalty applies to each related party for which a failure occurs for each 30-day period after the initial 90-day period ends.  Criminal penalties under sections 7203, 7206, and 7207 may also apply for failure to submit information or for filing false or fraudulent information.

This updated form (and the regulations that go with it) represent a significant expansion of the use of the form.  It is important to note if the foreign owner does not have a social security number (“SSN”) or an individual taxpayer identification number (“ITIN”), the foreign owner will need to obtain a SSN or an ITIN in order to file Form 5472; Administrative delays often occur during the process of obtaining a SSN or an ITIN.

Determining if you are required to file is a complex process.  We are available to discuss and assist you in meeting your filing requirements and tax compliance under these new measures.  Please do not hesitate to contact us at (212) 239-1931 or cjbyrne@byrnellc.com.