IRS Finalizes Form Modifications Disregarded Entities with Single Foreign Owner

IRS to Finalize Form Modifications for Taxpayer Compliance with Regulations on U.S. Disregarded Entities with a Single Foreign Owner

This past April we published a blog article regarding the final regulations released by the Internal Revenue Service (IRS) that apply to U.S. disregarded entities (hereafter referred to as “U.S. DEs”) wholly-owned by a foreign person. These regulations treat U.S. DEs wholly-owned by a foreign person as domestic corporations separate from their owner for purposes of reporting, record maintenance, and associated compliance requirements that otherwise apply to 25% foreign-owned domestic corporations under Internal Revenue Code (IRC) §6038A. In all other respects a U.S. DE wholly-owned by a foreign person and their transactions remain disregarded for federal income tax purposes. Our article outlined the provisions of the final regulations and the significant penalties for noncompliance (http://kurtzcpa.com/new-irs-regulations-disregarded-entities/).

The final regulations require a U.S. DE wholly-owned by a foreign person to annually file a Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.” The IRS recently released a draft of the 2017 Form 5472. The draft instructions indicate that U.S. DEs must file a pro forma Form 1120, “U.S. Corporation Income Tax Return”, with Form 5472 attached. The Form 1120 need only list the name and address of the foreign-owned U.S. DE, its employee identification number, whether it is an initial or final return, and whether its name or address has changed. “Foreign-owned U.S. DE” should also be written across the top of Form 1120.

The draft Form 5472 reflects three distinct modifications made in order to implement the regulations. These changes are as follows:

  1. In Part I, line 3 was added to indicate that a foreign-owned U.S. DE is filing Form 5472.
  2. In Part II, lines 1-4, boxes were added to request the foreign taxpayer identifying number (FTIN), if any, of a foreign owner of a foreign disregarded entity.
  3. A new Part V was added (and subsequent Parts renumbered) to identify certain reportable transactions of foreign-owned U.S. DEs.

Form 5472 should be attached to the pro forma Form 1120 and filed by either (1) mailing it to the Internal Revenue Service at 201 West Rivercenter Blvd., PIN Unit, Stop 97, Covington, KY 41011 or (2) faxing it to the number that the IRS will eventually post at http://www.IRS.gov/form5472. Final versions of 2017 Form 5472 and its corresponding instructions should be released in the coming weeks.

The final regulations and filing requirements became effective for tax years beginning on or after January 1, 2017 and ending on or after December 31, 2017.

For more information on the final regulations and the filing requirements outlined in this article please contact a tax professional.

About The Author

Daniel Quintana

Daniel Quintana of Kurtz & Company, P.C. in Dallas Texas. https://www.linkedin.com/in/drquintana