Form 8858 Instructions
As an expat, it can be difficult to understand the ins and outs of tax filing, especially if you own assets or have business units outside of the U.S. So, let’s take a look at one form issued by the IRS which might be troubling you.
What is Form 8858?
Form 8858 is the Information Return of U.S. Persons with Respect to Foreign Disregarded Entities. This means that anyone who has business assets outside of the U.S. but is a U.S. citizen or using a Green Card, will need to file this form to declare their business finances alongside their Federal Tax Return.
This is because the business is disregarded as a personal entity and classed as completely separate to the owner for tax purposes.
What is a Foreign Branch?
In recent years, many more people have been required to fill out Form 8858 to declare a foreign disregarded entity. This is because of a change in tax law which took place in 2018, that included other entities in this bracket, meaning that people who used to file certain aspects of their business finances on their Federal Tax Return, now had to file them separately.
These new sections are called Foreign Branches and are allocated a section of Form 8858 form specifically. A foreign branch includes any business or venture that keeps financial records of incomings and outgoings or ‘books’ regarding revenue separate to standard employment income.
These records can be anything from spreadsheets or receipt pads, right up to larger accounting software or applications. If there is evidence of revenue, then Form 8858 may be relevant to you.
What Qualifies as a Qualified Business Unit (QBU)?
In the bracket of foreign branches, we’d expect to find larger businesses that may operate globally. Meaning that certain offices or elements of the business are likely to be outside the U.S.
However, there are also smaller entities which may be seen as a Qualified Business Unit (QBU) for tax purposes.
Two of the largest groups of people affected are those who are self-employed and those that own investment property outside of the U.S.
If you have a small business or you’re a freelancer generating more than $400 per year through self-employment, then you will get caught up as a QBU and will need to fill in the 8858.
Similarly, those who have an investment property outside the U.S. which receives rental income will also need to complete Form 8858.
Unfortunately though, if you happen to have investment properties and a freelance gig, you can’t put them on the same 8858 form. This means you’ll likely need to fill out two forms alongside your Federal tax Return. If this is the case, make sure you leave plenty of time before the filing date of April 18 (June 15 for ex-pats) to get your documents in order. A late filing could cost you.
What Happens if You Don’t File an 8858?
Some business owners and significant shareholders are used to filing Form 5471 for a non-U.S. Corporation. However, due to new tax laws, many of these people now need to add Form 8858 too. Not everyone, but many. This has caused some confusion in recent years and has led to late filings. Get professional tax advice from someone that has good experience with preparing US federal tax returns for businesses that are established outside of the United States.
File Form 8858 at the same time as your Federal Tax Return. You may request an extensions if required. But with tax extensions, remember, the actual tax does need to be paid by the deadline of April 18 regardless of where you live, even if you’re an ex-pat.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
Like most IRS forms, there is a penalty for not filing on time. The penalty for non-filing or late filing is $10,000.
The IRS will send out reminders for late filings giving you 90 days to file from the date of the letter. They will then charge an extra $10,000 on top of your original penalty for every 30-day period that passes after that initial 90 days where your form hasn’t been filed.
The maximum penalty equates to $50,000 per form not filed. So, if you have investment properties and are self-employed, this could be a total of $100,000, which really isn’t a small sum and for a small freelance business, could have disastrous consequences.
However, the IRS don’t always enforce their penalties on late filing. There may have been occasions when you’ve filed late before and not received a penalty. This is because the IRS sometimes alternates the Forms which they choose to enforce. Just because you’ve filed late and not received a penalty in the past, it doesn’t mean you won’t get one this time.
How You Can Get Help Filing Your 8858
It can sometimes be difficult to understand whether you need to file Form 8858 or not. If you’re unsure if it applies to you, you should seek help from a tax professional who can look into your financial background and understand which forms are necessary for your situation.
If you have been filing a U.S. Federal Tax Return and have some form of self-employment or rental income and haven’t filed an 8858 before, then it’s worth speaking to the professionals too, even if you’re filing late as they could look at using the IRS amnesty program.
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