Confused over US Source or non-US Source income

[fcacciola]

Hi,

My partner and I registered an LLC in Florida but we are both Argentinia (NRNC). We provide computer programming services and the programmers doing so are also Argentinian.

When our LLC provides services to a US company, the icome paid by the client company (to a US bank account FWIW), is US source or not?

Our CPA is telling me that is NON-US Source because all the partners and the freelance programmers involved are all Foreign Aliens, but I disagree.

My reading of the IRS pages is that this is US Source income because the service is not personal. Is provided by the LLC, not by the foreign programmers, so it is irrelevant the localtion of the work performed.

How is it?

TIA

 

[LdiJ]

Hi,

My partner and I registered an LLC in Florida but we are both Argentinia (NRNC). We provide computer programming services and the programmers doing so are also Argentinian.

When our LLC provides services to a US company, the icome paid by the client company (to a US bank account FWIW), is US source or not?

Our CPA is telling me that is NON-US Source because all the partners and the freelance programmers involved are all Foreign Aliens, but I disagree.

My reading of the IRS pages is that this is US Source income because the service is not personal. Is provided by the LLC, not by the foreign programmers, so it is irrelevant the localtion of the work performed.

How is it?

TIA

Had you not registered the LLC in FL and were providing the services via an Argentinian company I would agree with your CPA. However, since a FL LLC is the company providing the service and collecting the money, I tend to agree with you.

 

[fcacciola]

Had you not registered the LLC in FL and were providing the services via an Argentinian company I would agree with your CPA. However, since a FL LLC is the company providing the service and collecting the money, I tend to agree with you.

Indeed. And how I figured this out is also relevant:

I thought that is then Argentinian source, but once I tried to figure out how and who would pay the corresponding taxes here I realized it must be wrong.
My partner and I are only partners in the LLC, not here. And the freelance programmers invoice the LLC, not an individual or entity here. So, I don't see any way for any inidividual or entity in Argentina to pay taxes for an item of income paid by a US company to another US company, because all the argentinian parties involved are completly unconnected locally.
I consulted with local accountants here and non ever heard of a regulation that would allow something like that. In fact, none of them would even know how to file the tax returns for such an income, or from whom.

So I can only conclude that it is US source. OTOH, we cannot start doing bussines without knowing for sure all the tax obligations, and this is just the tip of the iceberg (see next post)

Thank you for the response.

 

[LdiJ]

Indeed. And how I figured this out is also relevant:

I thought that is then Argentinian source, but once I tried to figure out how and who would pay the corresponding taxes here I realized it must be wrong.
My partner and I are only partners in the LLC, not here. And the freelance programmers invoice the LLC, not an individual or entity here. So, I don't see any way for any inidividual or entity in Argentina to pay taxes for an item of income paid by a US company to another US company, because all the argentinian parties involved are completly unconnected locally.
I consulted with local accountants here and non ever heard of a regulation that would allow something like that. In fact, none of them would even know how to file the tax returns for such an income, or from whom.

So I can only conclude that it is US source. OTOH, we cannot start doing bussines without knowing for sure all the tax obligations, and this is just the tip of the iceberg (see next post)

Thank you for the response.

Ok, lets break it down a bit.

You have a US partnership that is making sales and collecting proceeds. That US partnership is also paying out invoices to foreign sources. Therefore the only tax obligations of the US company are to the profits of the US partnership, which in a partnership situation transfer to the partners...which makes things complicated for you and your partner.

Perhaps in your situation it would be more prudent for your LLC to elect to be taxed as a corporation rather than as a partnership. This is allowed under US law.
In that instance your US "corporation" would pay taxes on its profits, and while there might be some tax to you and your partner, it would be based on dividends rather than partnership profits.

I suggest that you consult another US CPA than the one you have been consulting with up to this point.

 

[fcacciola]

Ok, lets break it down a bit.

You have a US partnership that is making sales and collecting proceeds. That US partnership is also paying out invoices to foreign sources. Therefore the only tax obligations of the US company are to the profits of the US partnership, which in a partnership situation transfer to the partners...which makes things complicated for you and your partner.

Perhaps in your situation it would be more prudent for your LLC to elect to be taxed as a corporation rather than as a partnership. This is allowed under US law.
In that instance your US "corporation" would pay taxes on its profits, and while there might be some tax to you and your partner, it would be based on dividends rather than partnership profits.

I suggest that you consult another US CPA than the one you have been consulting with up to this point.

As a matter of fact, the current CPA ended up suggesting precisely that. However, IIUC, an LLC that elects to paid taxes as an S-Corp is in the 39.6% tax-rate (IIRC), AND, we have to pay taxes for dividindes wich in our case would be basically all of the profit. At the prospective bussines size this is over our heads.

Having said that... I learned today that, even for the case of an LLC taxed as an LLC, since we are FA any ECI gets a withholding of 39.6%.

Is that correct?

And OTOH, I've read mixed opinions on the tax-rate that would apply, even for the simpler case of LLC ECI's. Some said that we'll have a 30% rate for being FA and others said we (since the LLC is pass-through) will paid based on the normal bracket, just as if we where resident.

How is it?

 

[fcacciola]

.

I suggest that you consult another US CPA than the one you have been consulting with up to this point.

I agree. Unfortunately, I've been reading several threads in various forums and when it comes to foreign partners, there seems to be a lack of experience in most CPA since in many cases the posters mentioned that their CPA are failing to get the laws correctly. One even consulted 3 CPAs and they all contradicted each other.

So we plan to hire a different CPA for sure, but I decided that I better collect as much information as possible on myself first. Specially because at this point, we might simply don't do any business at all if due to taxes it fails to be cost effective.

 

[LdiJ]

As a matter of fact, the current CPA ended up suggesting precisely that. However, IIUC, an LLC that elects to paid taxes as an S-Corp is in the 39.6% tax-rate (IIRC), AND, we have to pay taxes for dividindes wich in our case would be basically all of the profit. At the prospective bussines size this is over our heads.

Having said that... I learned today that, even for the case of an LLC taxed as an LLC, since we are FA any ECI gets a withholding of 39.6%.

Is that correct?

And OTOH, I've read mixed opinions on the tax-rate that would apply, even for the simpler case of LLC ECI's. Some said that we'll have a 30% rate for being FA and others said we (since the LLC is pass-through) will paid based on the normal bracket, just as if we where resident.

How is it?

You cannot elect to be an S-corp. You can only elect to be a C-corp as the shareholders would not be US citizens. The first 50,000 of profit would be taxed at 15%. The next 25,000 of profit would be taxed at 25%. The following 25,000 of profit would be taxed at 34%, and then the 39% bracket does not kick in until profits reach 335,000.

The 30% amount that you are hearing is the "backup withholding rate". That is the amount that your company would be required to withhold from any dividends paid to you as foreign nationals. That however is not the actual tax that you would owe. That would be a deposit towards your taxes done to ensure that you actually file a tax return.

 

[fcacciola]

You cannot elect to be an S-corp. You can only elect to be a C-corp as the shareholders would not be US citizens. The first 50,000 of profit would be taxed at 15%. The next 25,000 of profit would be taxed at 25%. The following 25,000 of profit would be taxed at 34%, and then the 39% bracket does not kick in until profits reach 335,000.

The 30% amount that you are hearing is the "backup withholding rate". That is the amount that your company would be required to withhold from any dividends paid to you as foreign nationals. That however is not the actual tax that you would owe. That would be a deposit towards your taxes done to ensure that you actually file a tax return.

Thank you again for the response. Indeed I mismatched the types of corp. I recall one was for US-residents.

So on the one hand the C-corp taxed LLC would pay bracket taxes on net income like you described.

What I need to figure out next is what do we the partners pay. IIUC, the LLC may share all of the net income as dividens, in which case we pay 15 to 20% on that (IIRC). Or we can have a salary and no dividens. Or a mix of two. But, can in fact we as NRNC have a salary from the LLC? If so, where do I research the taxation of such salary?

Lastly, say we share all profit as dividens, so we have to pay say 20% of that. What happens with the outstanding 10% withhold?

TIA

 

[LdiJ]

Thank you again for the response. Indeed I mismatched the types of corp. I recall one was for US-residents.

So on the one hand the C-corp taxed LLC would pay bracket taxes on net income like you described.

What I need to figure out next is what do we the partners pay. IIUC, the LLC may share all of the net income as dividens, in which case we pay 15 to 20% on that (IIRC). Or we can have a salary and no dividens. Or a mix of two. But, can in fact we as NRNC have a salary from the LLC? If so, where do I research the taxation of such salary?

Lastly, say we share all profit as dividens, so we have to pay say 20% of that. What happens with the outstanding 10% withhold?

TIA

You get the outstanding 10% back as a tax refund when you file your US non-resident tax return.

 

[davew128]

I've been travelling for a few days and just seeing this now. OP, you have a major headache here. Find another tax advisor who is more familiar with foreign reporting requirements. Your current one is in over his head. While I don't have a fundamental problem with electing a C corp status, it just adds to the compliance problem with foreign disclosures on the return (5472). While remaining a partnership doesn't have that level of disclosure, the withholding requirement still applies.

 

[fcacciola]

I've been travelling for a few days and just seeing this now. OP, you have a major headache here. Find another tax advisor who is more familiar with foreign reporting requirements. Your current one is in over his head.

Indeed. To the point that I'm standing by and haven't started the busiess, just because I still don't know for sure how much tax do I have to pay, and how so.

How do I find another tax advisor that is for sure experienced with our case?

While I don't have a fundamental problem with electing a C corp status, it just adds to the compliance problem with foreign disclosures on the return (5472). While remaining a partnership doesn't have that level of disclosure, the withholding requirement still applies.

So, if we remain an LLC, we have a 39.6% withholding on the NET income allocable to the foreign members, which IIUC, is all of the NET income given that we are all foreign members.

Is that correct?