A foreign-owned single-member LLC is treated as a corporation for US tax reporting requirements. Foreign-owned corporations must file IRS Form 5472 or they face up to $25,000 in penalties.
How do you prevent Form 5472 penalties?
Start by making sure that you understand the foreign-owned single member LLC filing requirements.
In this post, we answer your top questions about Form 5472.
1. What is the purpose of Form 5472?
To start, what exactly is IRS Form 5472?
Simply put, IRS Form 5472 is an information return. You use this form to report transactions between yourself as a foreign owner and your US LLC.
(Keep in mind that this is just a general answer – we’ll get into more details later in this post).
Now, you might be wondering: “What is an information return?”
An information return is a report that contains information about a taxpayer or their company. It doesn’t create a tax liability.
In short, Form 5472 is a way for the IRS to keep track of all the transactions that occur between a US entity and its foreign owner.
2. Who must file Form 5472?
Even though an LLC is a disregarded entity, meaning all income flows through to its owner, a foreign-owned US disregarded entity must file a US tax form. The IRS treats a foreign-owned US LLC as a corporation. A US corporation must file IRS Form 5472 if it has:
- More than 25% foreign ownership, shareholders, or partners (either directly, indirectly, or constructively), and
- Any reportable transactions (more on this in a minute).
This might seem a bit overwhelming—especially if this is your first time dealing with the IRS.
In the next two questions, we’ll explain in more detail what foreign ownership and reportable transactions are.
3. How is foreign ownership determined?
In general, foreign ownership occurs when someone who does not have a US passport or Green Card opens a US corporation.
Though this isn’t always straightforward because ownership of a US corporation can be direct, indirect, or constructive.
Here is what those terms mean:
- Direct: You own a part or all of a US corporation in your own name.
- Indirect: You own another disregarded entity like an LLC that owns the US corporation.
- Constructive: You are close to the owner of the US corporation, for example, your spouse, so the IRS treats you as the owner.
Misunderstanding these terms is a common mistake we see as accountants. Unfortunately, if not handled correctly, this simple mistake could result in a Form 5472 penalty.
As you can see, Form 5472 can be quite complex.
Working with a tax expert helps protect you and your business from costly penalties and mistakes. Get in touch with our expert team to make US filing obligations easy.
4. What are Form 5472 reportable transactions?
A reportable transaction is any exchange of money or property between a US corporation and its foreign shareholder.
This is an area where new foreign owners frequently make mistakes.
To make things easier, here are examples of reportable transactions for Form 5472:
Example 1: You as a foreign owner pay any expenses of the LLC from your personal bank account.
Example 2: You receive money from the LLC into your personal bank account.
Remember, these are just examples to illustrate the concept. Other exchanges can also be considered reportable transactions.
Finally, keep clear records of any transactions between yourself and your LLC to avoid issues with the IRS.
If tracking these transactions gets too complicated or time-consuming for your business, one of the easiest ways solutions is to hire a bookkeeping service.
Reach out to our incorporations team for more about how we can alleviate the burden of bookkeeping.
5. What is reported on this informational tax form?
On IRS Form 5472, your foreign-owned corporation reports general information about the company and the reportable transactions.
Here is some of the information you must include:
- Personal information about the foreign shareholder(s)
- The location where the business is conducted
- The type of business activity being carried out
- Any reportable transactions between the foreign owner and the LLC
For more information on this, visit the IRS Form 5472 Instructions.
6. I just opened an LLC and have not done any business yet; do I still need to file IRS Form 5472?
Many new LLC owners don’t think they have any Form 5472 reportable transactions because they haven’t conducted any business yet.
Unfortunately, this often is not true.
According to the IRS definition of a reportable transaction, even the money you use to create the US LLC is a reportable transaction.
In other words, if you paid $150 from your personal bank account for formation costs when setting up the US LLC, then you have a reportable transaction.
This means that in your first year of ownership, you will likely need to file Form 5472.
7. How do I file form 5472?
You file this tax form together with your company’s annual tax return. The annual tax return is called Pro-forma 1120. The 5472 form cannot be e-filed. Instead, you submit it by paper or fax.
The due date is April 15 but you can request an extension to October 15. Our team can help with that.
Completing the form can take from a few hours to a couple of days, depending on the number of transactions. Plus, many business owners will spend additional time on recordkeeping.
In addition, filing Form 5472 on your own has risks. People who file it incorrectly may face high a penalty for their mistakes.
As accountants, one of the most common mistakes we see LLC owners make is incorrect reporting, especially when it comes to dividends.
8. Do I need to pay taxes when filing the 5472 form?
We have good news. Filing Form 5472 does not trigger any US taxes. It is only an information return. You personally as a foreign owner and the corporation will not owe US tax on this form.
However, your foreign-owned corporation might owe US taxes on other forms. This depends on the business situation. Check out our blog post about tax-free LLCs to learn about common US tax pitfalls.
Keep in mind, that you may still have to pay tax on the business income in your home country. Please consult a local tax advisor.
9. What is the difference between Form 5471 and Form 5472?
Both forms have a similar informational purpose, no tax due, and extremely high penalties for failure to file or filing incorrectly.
So, how are these forms different?
Form 5471 is for foreign companies owned by US persons.
Form 5472 is for US companies owned by non-US persons.
10. What are the penalties for failure to file or filing late?
If you don’t file on time or if you file it incorrectly, the Form 5472 penalty of $25,000 may be imposed on your company.
This penalty also applies if the corporation fails to maintain adequate records as required by the IRS.
For help understanding your reporting obligations and filing Form 5472, reach out to one of our US LLC experts.
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