Failing to Comply With New Form 8858 Filing Requirement for Foreign Realty Rentals and Business Income Can Result in Loss of Tax Credits
March 11, 2022
In 2020, the U.S. implemented a new filing requirement for those who own certain foreign real estate rental properties or businesses and use IRS Form 8858.
Effective beginning in the tax year 2018, the IRS expanded the scope of those U.S. persons required to file a Form 8858 with their tax return. In addition to reporting foreign disregarded entities (FDEs), foreign branches (FBs) must now be reported on the 8858.
Failure to comply with the new filing requirements for form 8858 in a timely manner can result in a reduction in the allowable foreign tax credits, potentially increasing your U.S. income tax. Financial penalties may also apply in some cases.
Specifically, the tax code requires all U.S. persons (i.e., U.S. citizens and residents, and domestic corporations, partnerships, trusts, and estates) to file IRS Form 8858 with respect to “any foreign business entity” which such person controls. IRS Form 8858 is also separately required for owners of “foreign disregarded entities” (FDEs), and the same potential penalties apply.
For purposes of IRS Form 8858, the tax code states a foreign business entity means a foreign corporation or foreign partnership. However, under the authority of sections 6011, 6012, 6031, and 6038 of the Internal Revenue Code and Treasury Regulation §1.367(a)-6T(g), the instructions to IRS Form 8858 state that Form 8858 must also be filed for a foreign branch. In other words, a foreign business entity includes a foreign branch. For IRS Form 8858, a foreign branch includes a foreign “qualified business unit” (QBU).
Understanding what constitutes a foreign branch for purposes of filing Form 8858, how a qualified business unit (QBU) is determined, and or determining what activity that rises to the level of a trade or business is a complex process. However, it is critical that taxpayers who receive income from foreign rental properties or other foreign business activities understand the nuances of such definitions and use IRS Form 8858 accordingly.
How AbitOs Can Help
Understanding how to properly comply with the new filing requirements implemented for Form 8858 for foreign realty rentals and business income is a completed matter. You can take a deeper dive into the implications of the new requirements and the applicable definitions and codifications by reading our full report on the matter here.
Or, you can contact us. Our international tax experts will be happy to walk you through the new guidance for the use of IRS Form 8858, go over your properties and entities, and make sure you are in complete compliance and able to receive your maximum tax credits while minimizing your U.S. tax liabilities.
AbitOs specializes in the unique accounting needs of high net-worth individuals with international lifestyles as well as for entities doing business in LATAM and across the globe. Complying with the new filing requirement for Form 8858 can be quite complex. If you would like to benefit from our expertise in these areas or if you have further questions on this Alert, do not hesitate to contact us.