U.S. Tax Reporting Japanese Foreign Entity

Recently, a real estate company in Sapporo Japan contacted me about a U.S. Expat working in Hokkaido that owns a Japanese company. Their client was looking for a tax expert to prepare his federal and state tax returns. Of significance was that he owns a Japanese Gōdō gaisha, a business entity modeled after an American limited liability company, an LLC. Knowing exactly how the IRS assesses taxes for a foreign entity can make a person unfamiliar with the process feel a bit like Alice falling down the rabbit hole. To avoid having the entity treated as a corporation, it requires the filing of Form 8832: Entity Classification Election with the election to have it treated as a disregarded entity. Part I, box f will need to be checked for a foreign disregarded entity election.

The problem is that the 8832 was not filed at the beginning of the tax year. Fortunately, the IRS allows late election relief. This late-classification relief is granted under Revenue Procedure 2009-41, 2009-39 I.R.B 439. A late election relief is also available if you are changing the entity classification under Rev. Proc. 2010-32.

To be eligible for the Late Election Relief, the entity must not have filed a federal tax or information return for the first year in which the election was intended because the due date has not passed for that year’s federal tax or information return or the entity has timely filed all required federal tax returns and information returns consistent with its requested classification for all of the years the entity intended the requested election to be effective and there was no inconsistent tax or information returns have been filed by the entity in any of the tax years.

We had the client also file for an EIN for the entity to use on Schedule C, which can usually be done on the IRS website or by filing a Form SS-4; however, in this case, the option was not available for the foreign entity, and the EIN was obtained by contacting the IRS at 267-941-1099.

Now, we were able to report the income on Schedule C and avoid the filing of the corporate return and Form 5471. However, we were not done yet. With a foreign disregarded entity, is not only a Schedule C required but also an information return, Form 8858, a simple form consisting of an Income Statement, Balance Sheet, and some foreign currency and foreign income tax paid questions. Once the U.S. 1040 personal income tax form is filed, you will mail Form 8858 within 3 days of the IRS accepting the return.

As you can see, there is a lot to consider when you own a foreign business entity and Genesis Tax Consultants, LLC is here to help.

Nicholas Hartney, EA, CAA