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March 16, 2018 - Phil Hodgen

In Which Form 5472 is Required and not Required

Does a treaty election to be taxed as a nonresident of the United States trigger a Form 5472 filing requirement? The Schrödinger’s cat meme gives us the answer. Yes and no.

The Setup

Imagine a green card holder living outside the United States. She is the sole shareholder of a domestic corporation.

For various good and valid reasons, our green card holder decides to make an election under the applicable income tax treaty’s tiebreaker rules to be treated as a resident of the foreign country where she lives, and thereby be treated as a nonresident of the United States for income tax purposes.... continue reading

Friday Edition
March 2, 2018 - Phil Hodgen

Form 8833, Nonresident Status Under a Treaty, and Penalties

Simple question:

A taxpayer who wishes to invoke an income tax treaty to claim nonresident alien status for U.S. income tax purposes–must Form 8833 be filed to claim this status?

The answer is no. A taxpayer may claim nonresident alien status for U.S. income tax purposes without filing Form 8833 to tell the IRS about this tax reporting position.

The follow-up question is also interesting:

What’s the worst that can happen if the IRS audits an income tax return and claims that Form 8833 is missing?

The worst that can happen is that the IRS can impose a $1,000 penalty. But the IRS cannot disallow the treaty claim to nonresident status.... continue reading

Friday Edition
February 16, 2018 - Phil Hodgen

Section 199A Works for Nonresident Aliens

Section 199A Deductions

Reader B.B. from Miami Beach asked a such a simple1 question:

Are NRAs with pass-through U.S. entities eligible for the [IRC Section 199A] deduction?

What follows is my incomplete answer. A complete answer would require me to fully understand Section 199A. And I would rather die in a fire than become intimate with Section 199A.

Foreshadowing the Denouement

Short answer: I think so.

Let’s be precise. I am talking about a nonresident alien who has effectively connected income. With that clarification, I think a Section 199A deduction is allowed because:

  • Section 199A doesn’t say a nonresident alien is forbidden from taking the deduction; and
  • A nonresident alien with effectively connected income will have the right type of income–the kind of income that generates a Section 199A deduction.
... continue reading
Friday Edition
February 2, 2018 - Phil Hodgen

GILTI: In Which Foreign Corporation Income is Made Taxable

Poker players are always looking for tells — inadvertent signals by their opponents. The Tax Cuts and Jobs Act has a tell. Our Federal government has told us what they think of us.

They think we are incipient felons.

If you had any doubt about our how our Federal Overlords view us, new Internal Revenue Code Section 951A should clarify things for you. This new law introduces a new acronym: GILTI.

Not Quite Territorial Taxation

The new tax laws are great if your name is Apple or Google.

But for American entrepreneurs living abroad and running regular businesses, (tax) life is worse in 2018 than it was in 2017.... continue reading

Friday Edition
January 19, 2018 - Phil Hodgen

The Evident Accounting Complexity of Section 951A

There has been a lot of ballyhoo over the last few years about mega-multinationals (like Apple and Google) and their international tax structures. The amounts of money stashed abroad are staggering. But frankly, spending time complaining about Apple and Google’s tax planning is a mug’s game — the political ideologue’s version of smugly judgmental nattering about the Kardashians.

Meanwhile, real people roam the surface of Planet Earth, living real lives. Think of a normal American citizen living abroad, running a consulting business with $1 million of revenue and $500,000 of expenses. That’s real, and his problems are worth talking about.

Our American citizen abroad is the human embodiment of a multinational business enterprise.... continue reading

Friday Edition