U.S. tax filing requirements for nonresident owners of Delaware LLCs

ByPhil Hodgen Published Latest Update
Delaware has a reputation (amongst BS artists and politicians, oops sorry for being redundant) for being a tax haven. Here’s a bit of reality for you. How you use this reality is up to you. I’m limiting this discussion to Federal income tax. Not State income tax. There are too many variations on the State side. Assume these facts Nonresident human being or non-U.S. corporation owns all of the membership interests in a Delaware LLC. In other words, there is one owner. U.S. tax treatment The Delaware limited liability company is by default treated as a disregarded entity for U.S. tax purposes. It is a “tax nothing.” It doesn’t exist. The default treatment can be changed by filing Form 8832 and electing an alternate treatment. (PDF). This means that if the Delaware limited liability company has any income it does not file an income tax return with the U.S. Federal government’s tax collection bureaucracy, the Internal Revenue Service. Instead, the owner of the Delaware limited liability company is on the hook to file a U.S. income tax return. The Delaware limited liability company’s income is treated as if it is earned directly by the owner. The owner (whether human or corporate) looks to the U.S. tax law to see whether the income received by the Delaware limited liability company is taxable in the United States. If so, it is tax return time. A nonresident/noncitizen human files Form 1040-NR (PDF) and a non-U.S. corporation files Form 1120-F (PDF). Why pick on Delaware? So. Does that make Delaware a tax haven? You can do exactly the same thing in any of the other States if you want to. Same result. Why pick on Delaware if this is a Federal tax law–not a Delaware law–that caused the result? Poor little Delaware.

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Phil Hodgen

Philip D. W. Hodgen is the principal attorney of HodgenLaw PC, an international tax law firm based in Pasadena, California. He earned his undergraduate degree from Claremont McKenna College and his law degree from the School of Law at the University of California, Los Angeles. He then went on to earn a Master of Laws degree with a specialty in taxation from the University of San Diego School of Law. Admitted to the California bar in 1982, Phil spent nine years in law firms and with a large U.S. bank before starting his own firm in 1991.
Phil is a past chair of the International Tax Committee of the State Bar of California's Tax Section and was a member of the Executive Committee of the State Bar of California's Tax Section for 2004-2007. Phil frequently speaks on a variety of international tax, trust and estate topics to attorneys, accountants, and real estate professionals.

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2 Comments

  1. A real estate investor will pay tax in the United States on rental income received and on the capital gain (profit) when the real estate is sold.

    Usually I see the investor open an account in the USA to receive rent and pay the expenses for the property.

    Phil

  2. What about foreigners investing in US Real Estate?
    What taxes will they have to pay on their profits and where?
    Is it better to have a business account for the LLC or can the rents be wired straight to their personal account?

    Thank you very much for your help.

    Steve

Comments are closed.

Tax laws change over time, and the information in this post above may be less accurate today than it was at the time of the last revision. This post is not tax advice for your specific situation. Please contact an international tax professional to get personalized advice for your situation.