Producers: Don’t Overlook Your Tax Obligations for U.S. Nonresident Investors
By Polina Inberg | January 23, 2020
Frequently, theatrical productions have non-U.S. partners that are attracted to the flexible investment options, limited risk not exceeding their investment, and unique tax incentives provided in the United States. While production companies welcome the capital, the partnership should keep in mind the tax obligations it incurs when taking on a foreign partner, not to mention the tax obligations of that foreign partner.
A foreign partner in a partnership that is engaged in a U.S. trade or business, by definition, is considered to be engaged in that business themselves and thus become a US taxpayer under section 875 of the Internal Revenue Code. While this means the foreign partner has a responsibility to file federal income and informational tax returns, as well as potentially, state returns, the partnership also incurs an additional responsibility to pay a withholding tax on all income that is effectively connected with the conduct of the trade or business within the United States which is allocable to foreign partner under section 1446 of the IRC, along with potential information reporting responsibilities. The withholding tax liability is applicable even if the net result for the year is a loss for the foreign partner. The foreign partner gets to credit the partnership withholding amount against their tax liability when they file their federal income tax return.
Partnerships should take the following steps to maintain compliance with these withholding tax requirements:
- Review partnership files for valid U.S. tax identification numbers (TINs). A foreign partner whose tax liability is less than the withholding amount suffered may only claim a tax refund if they have a valid TIN. To ensure proper crediting of the withholding tax, a partnership must provide a U.S. TIN for each foreign partner. Even if a foreign partner does not provide a U.S. TIN, the partnership will be required to make a payment on the partner’s behalf.
- Make quarterly installment payments. The quarterly payments are mandatory and are due on or before the 15th day of the 4th, 6th, 9th and 12th month of the partnership’s tax year for any gross income considered effectively connected taxable income.
- File Form 8804. At the end of the year, when the partnership is preparing its tax return, it will file annual Form 8804 and report all quarterly payments. Each U.S. nonresident partner will receive Form 8805 included with the Schedule K-1 package, which will show how much tax was withheld and remitted to the government on the partner’s behalf.
If these steps are followed, producers can reap the full benefits of capital from non-U.S. investors without the risk of penalties, interest, IRS examinations and non-compliance threatening the full impact of the investment.
It is important that foreign investors discuss U.S. tax filing requirements and possible advantages with a U.S. tax advisor. For more information, please contact author Polina Inberg, CPA, or a member of Marks Paneth’s Theater, Media & Entertainment Group.
About Polina Inberg
Polina Inberg, CPA, is a Director in the Theater, Media and Entertainment Group at Marks Paneth LLP. She prepares tax returns for Broadway, Off-Broadway, touring and international theatrical companies; production companies; foreign corporations; and foreign and domestic high-net-worth individuals. Many of her clients have multi-state activities for which she conducts research, oversees any necessary registrations, prepares annual state, payroll and sales tax returns, and any other filings they are subjected to. She also handles federal, state... READ MORE +