IRS Makes it Costly to Make a Late Flow Through or Disregarded Entity Election if Not Filed TImely for Foreign Entities

It is becoming very expensive to get a private letter ruling from the IRS.  This ruling procedure is required when you wish to make a late election to treat a foreign entity as a "flow through entity." The new fees (which are also applicable to other IRS private rulings are below:

Rev. Proc. 2017-1.  includes the new user fees for seeking relief under Treas. Reg. §301.9100 ("9100 relief").  A taxpayer might seek 9100 relief in order to make a late election, such as a late entity classification election (also known as a “check-the-box election”) on Form 8832.

The new IRS fees are effective for requests received after February 1, 2017.  The amount of the user fee depends on the gross income of the taxpayer:

1. Taxpayers with gross income of under $250,000 will have a 9% increase --- from $2,200 to $2,400
2. Taxpayers with gross income greater than $250,000 and less than $1 million will have a 17% increase --- from $6,500 to $7,600
3. Taxpayers with gross income greater than $250,000 and less than $1 million will have a 2% increase --- from $9,800 to $10,000

Best to make the election in a timely manner. Read the instructions to form No.  8832  which is filed to make the "check the box" election for both domestic and foreign business entities.  Failure to make the election can result in some situations in adverse US tax consequences.  Email us at ddnelson@gmail.com if you need assistance or wish to discuss.

US Flow Through Tax Election for Your Foreign Corporation or LLC

You can make an election if you have a foreign corporation or LLC which may (depending on your individual  business circumstances) to treat that entity as a flow through entity for your US tax return. This means all profits and losses from the foreign entity flow through to you tax return. It also means you can offset any foreign taxes paid by the foreign entity against your US tax on that flow through income taking it as a foreign tax credit which will normally offset your US tax on that flow through income dollar for dollar. If the foreign tax rate is higher than your US tax rate, that will mean you will owe no US tax on that foreign entity's income on your US return.

Only certain foreign corporations or business organizations are eligible for the US flow through election. A list of the entities which are not eligible for this election are listed by country and included in the instructions for IRS Form 8832.  It is best to review this list and see what types of foreign entities will be eligible to make the flow through election if it would be beneficial to your US taxes prior to forming a foreign corporation or LLC.

You may have to talk with an International Tax Expert to determine if a flow through election will benefit your business plan.  It does avoid possibilities of double taxation (if you plan to distribute most of the income to yourself) and Controlled Foreign Corporation Subpart F rules as well as other potential US tax problems.  Most foreign attorneys and accountants who help you form your foreign business entity do not know these US tax rules.  It is often difficult after the fact to change the type of entity (depending on the foreign country in which it is formed) if you later discover that you do wish to have the income flow through to your US return.  We have helped well over a hundred expatriate business owners determining which type of foreign entity will be best for them under US tax law.