Partnership Withholding: Form 8804 & Form 8805

 

If a partnership with a foreign partner has income that is effectively connected with a US business or trade, it is required to file Form 8805, U.S. Partnership Withholding Tax Return, and Form 8804, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

Foreign partnerships often fail to pay taxes on income they earn in the United States. This article will explain how partnership withholding works and show you how it can benefit your business.

Key Takeaways

• Form 8805 and Form 8804 are used by partnerships to report any tax that was withheld from their members’ income.
• Failure to file forms 8805 and 8804 when required can lead to a number of tax penalties.
• If you fail to file these forms on time, the penalties for non-compliance will only increase.

What Is Partnership Withholding? 

If a nonresident alien is a partner in a US partnership, and the foreign country treats that partnership as an entity separate from its members for tax purposes (i.e., if it has “effectively connected income,” or ECI), then that partnership must withhold on the foreign partner’s share of ECI.

This is true of LLCs that pay taxes as a partnership, whether they are domestic or foreign.

Partnerships must pay this tax even if they make no cash distributions to the foreign partner, and regardless of that partner’s ultimate US tax liability. The good news is that you don’t have to pay withholding tax on any income that isn’t connected to a U.S. business or trade.

What Is Form 8804? 

Partnerships must complete Form 8804, listing every partner and foreign partnership they dealt with in a given year. If any withholding tax was paid overseas, it’s the responsibility of each U.S.-based partnership to report that on its version of Form 8805 as well as attach copies from all relevant forms sent by its foreign counterparts (even if no withholding is involved).

What Is Form 8805? 

Form 8805 is used to report the amount of ECI allocated to a foreign partner. If no withholding tax was paid and there are no other international tax issues involved, then only one copy needs to be sent out—to the foreign partner who is designated as having received that allocation.

When Are These Forms Due? 

If a partnership has partners located both inside and outside the United States, Form 8805 must be sent to every foreign partner no later than April 15.

The same deadline applies for filing Form 8804 and duplicate copies of each Form 8805 with the IRS. If the partnership is exclusively made up of foreign partners, the deadline for both forms is June 15th instead. If you aren’t able to file on time, you can use Form 7004 to request an extension. Just remember that this only extends the deadline for filing, not the deadline for paying the withholding tax.

What If the Partnership Doesn’t File These Forms on Time? 

The IRS imposes penalties on partnerships that fail to file Form 8804 by the deadline. If a partnership fails to file Form 8804 by the deadline, the IRS will typically apply a penalty of 5% of any unpaid withholding taxes for each month (or part of a month) that have passed since the deadline, up to a maximum of 25% of the unpaid taxes. And if the partnership files Form 8804 more than 60 days late, the minimum penalty will be $330.

However, if you can prove that you had a good reason for filing late (such as illness or an unavoidable trip), you may be able to avoid penalties.

How Do I File Form 8805 and Form 8804? 

Form 8805 is similar to Forms W-2 and 1099-MISC. All it requires is some identifying information about the partnership, as well as the foreign partner in question. Then, you’ll fill in the amount of tax the partnership withheld from that partner’s ECI (extraordinary dividend income).

Form 8804 is more like Forms W-3 or 1096. It merely summarizes withholding tax information. But remember: You must attach Form 8805 for every foreign partner, regardless of whether any withholding tax is paid.

To calculate and pay any withholding taxes for a foreign partner, use Form 8813. These payments must be made quarterly through the tax year, on the 15th day of April, June, September, and December.

To learn more about the laws surrounding these forms, review IRC section 1446.

Get Help from an Experienced Expat Accountant 

Although this article offers an overview of Forms 8805 and 8804, understanding US tax requirements for foreign businesses can be confusing. If you need further information, please contact us.