eSignature Licitness for Assignment of Partnership Interest in United States

How to eSign a document: e-signature licitness for Assignment of Partnership Interest in United States

okay for this video i wanted to go over the irs form 8804 and 88.05 the 8804 and 5s are filed by partnerships when they have u.s source effectively connected income that is being allocated to foreign partners and when they do that they need to withhold tax on those allocations and submit the tax to the irs so for this video i've got a couple pieces in front of us i've got the 804 and fives i've also got a sample 1065 partnership return that we can look at and then i've also got a slide here which outlines some of the rules and other information we need to consider and then i've got a fact pattern that we'll look at which will help us complete the 8804 fives and the 1065 return okay so for starting at the top here who needs to file this well every partnership whether it's domestic or foreign that has u.s source effectively connected gross income allocated to a foreign partner must file the 8804 report the allocation and the withholding tax now every foreign partner within that 1065 they get a k1 and they'll also get a form 8804 if they have any allocation of eci and any withholding taxes now the reason i highlight gross here is because you can have scenarios where partnerships have gross effectively connected income but they operate at a loss they still need to file the 8804 right so if we look at this example here if we have a u.s llc that's engaged in u.s trader business and it generates 250 000 of gross revenue and expenses of 300 the expenses of 300 mean that they're operating at a net loss of 50 000. now because they have a net loss there's no withholding tax that needs to be taken out on the allocations to the foreign partners but they still must file the 8804s because the standard is do you have gross income that's effectively connected they're not asking for net okay so in this case the 8004 must still be filed because the llc had gross effectively conducted revenues okay very very important distinction to make there now what are the withholding tax rates well they differ depending upon the tax classification of the foreign partner so partners that are foreign corporations are subject to a withholding tax of 21 this is the rate as of 2021 and then partners that are individuals trust partnerships they are subject to a 37 percent rate now how do they come up with these rates they use the top marginal tax rate for that given year so for 2021 corporations are paying a 21 corporate rate uh that's the top rate that they would pay so that's the rate that's um the withholding piece for these non-resident partners now partners that are foreign individuals they're subject to a 37 rate and that's because 37 percent is the top marginal tax rate for this year okay now let's talk a little bit about tax id numbers so a u.s tax id number is not required for the foreign partner when doing these forms so you can give an 8805 to a foreign partner without a u.s tax id number however the u.s tax id number is necessary if the foreign partner wants to subsequently file a u.s tax return and reclaim some of the excess tax okay so what's an example of where you would want to do that well remember here 37 is the top rate so if you have a foreign individual let's say they want to file a 1040 nr report their income and then report the withholding tax their effective tax rate might be a lot lower than 37 maybe after they report the income their effective rate is only 17 that means they've got a 20 over withholding amount so they can actually get a tax refund but again it's important that in order to be able to do that the foreign partner would need an item or if it's a foreign corporation it would need an ein and that information should be reflected on the 8805 as well so let's look at our example here and then we'll start looking at the 1065 and the 804. so in our example here we have consulting group llc it's a delaware llc and it has two partners we have john who owns 60 and then we have frank cohen's 40. now john is a u.s citizen and he lives and works from florida while frank is a citizen and resident of cayman islands okay so frank is going to be a non-us tax resident for federal income tax purposes he is not working in the u.s now the llc rents an office space in saint pete and has u.s base employees john is the owner he works from that florida office but frank being in the cayman islands he works remotely right so he doesn't come to the u.s he doesn't work from that u.s office he works remotely now given the activities of the llc in the u.s it is going to be considered engaged in u.s trader business and is going to have u.s source eci that's because of the us employees the u.s office john's physical presence in the u.s so the reason why that's important because now frank being a non-resident partner he's going to be subject to this withholding tax regime because we have eci being allocated through a partnership to a foreign person now the llc's financial figures we kept them very simple here to make the math easy for us so they have this much in revenue total expenses of twenty eight thousand one fifty so if we subtract the two we have net ordinary income of one hundred thousand dollars now the income is going to be allocated sixty forty right john gets 60 percent and frank's gonna get 40 now because again frank is a foreign partner the llc is going to have to withhold tax on the 40k of income and then report all of that information on 8804 and 88.05 now note here that the 8805 is only going to frank because he's the only foreign person john's a us person so he doesn't have any withholding tax on his income he just has to use his k1 report the income on his 1040 and he pays tax that way okay so let's look at the 1040 um sorry the 1065 and the 804. so here's our partnership return uh very simple partnership return we got the name of the company address ein and then here we have the revenue figures and then the expenses so there again is our one hundred thousand dollars of net ordinary business income that's what's going to be allocated to the partners so schedule b also has some information that we need all right so if we scroll down here to question 14 we have does the partnership have any form partners if yes enter the number of 805s attached in this case yes we do have a form partner and we're going to attach one for frank okay now let's start looking at the k ones let's go through here okay so this is the k one for john now remember john's the u.s person so we have john here general partner or llc member manager and he's a domestic partner right and so he's got a 60 000 allocation up there and then again there's no withholding tax for john's share because he is a us person now what about frank well let's look at frank's k1 so we have frank right we have frank's name his address he's an llc member manager right because he's an owner that actively participates in the business so it's appropriate to have member manager there but he is a foreign partner right so he's not domestic in this context and type of partner is an individual right that's important too because remember who is the income being allocated to is it an individual is it a foreign corporation is it a foreign partnership that's going to determine the withholding rate okay then up here line one we've got frank's ordinary income or loss so now where does this information get reported on the 8804 and fives well frank within his k1 here he should get a 805 right so 8805 we have form partner name id number now here if the foreign partner doesn't have an id number you can use foreign us as a placeholder and that that field will be accepted when you e-file okay so that's the appropriate field to use when you have foreign persons without a us id number now if frank had an itin you would use his item if this is a foreign corporation you would use the foreign corporation's ein or again foreign us if they didn't have one then we have address type of partner country coda partner frank is a cayman islands resident so cj as the code for the cayman islands and then down here we have partnerships ecti allocable to the partner frank's being allocated 40 000 right that's the line one amount and then the tax that's going to be allocated to frank is going to be the entire amount this will represent 37 of 40 000 right because remember being allocated to an individual so it's a 37 percent withholding rate now if we look at the eight of the fours we'll see how these totals end up on the 8804 so here's the 804 you only file one of these per year you file an 8805 for every partner that's being allocated the eci right that's form so we've got 1804 here name of the partnership the partnership is the withholding agent in this context so you can put same you don't have to enter the information again now if we get down on part three the two fields that you're most often going to be seeing and working with are 4a and then 4e so 4a total ecti allocable to corporate partners right so we have to report the corporate amount up there if any in this case we didn't have any foreign corporate partners so then 4e totally ci applicable to the non-corporate partners so 40 000 is the amount being allocated to frank as a non-corporate foreign partner now the reason why you have to separate these two is because of the tax rate calculation on the second page right so the gross 1446 tax liability 21 times the corporate partner amount 37 times the non-corporate partner allocation and again that's the 14 800 which is 37 percent of 40 000 and then at the bottom here we have the balance due okay so in this case the partnership didn't make any estimated payments during the year so the entire balance due is going to be owed with the filing of this form uh if there were estimated payments during made uh sorry if there were estimated payments being made during the year then you would have them reflected up here and then that would cut into the balance owed obviously and so there would be a true up or even maybe a refund at the end of the year depending on how much you paid in okay now the one thing i want to just highlight again here is the u.s tax id number so the u.s tax id number if you are going to apply for an itin wait to file these forms ideally until you have that item and the reason for that is if frank files this now and then later he gets an itin and he decides to file a tax return to reclaim some of this tax the irs is not going to be able to find it this is one of the limitations with their system when this withholding tax credit is going to be allocated to frank they need to be able to put an item number in here or else they'll never be able to trace it i see it happen time and time again and so what ended when what ends up having to occur is the partnership has to refile the 804 and 8805s as amended so you file corrected 804 and 5 you update the 8805 for frank's itin once it gets it and then once that's processed then they'll be able to trace this in the system and frank can go ahead and file this 1040 nr okay now the one last thing i want to touch on also is the withholding tax computation amount is again it's it's on the ordinary business income amount being allocated to the partner it does not matter that frank didn't receive any cash distributions during the year whether he did or did not the tax is calculated on the line one ordinary income allocation it's not the amount of cash that frank actually gets so that's why um it can be quite costly for not a lot of non-residents because you know they're paying tax and they're not receiving any cash from the partnership because all of it's going to the u.s government so again very important thing to keep in mind you're calculating it based on the allocation of the net profits not on the amount of cash being distributed to the foreign partner okay so that covers it for this video i hope that was helpful if you have any questions please leave me a comment below and i look forward to seeing you again on the next video thank you