This article will break down why Form 8858 is required and why this may be an additional filing requirement you have not previously had.

We have recently hosted a webinar specifically on this topic. You can find the link here: Webinar Q&A & Transcript

Form 8858 is the Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FB). Form 8858 must be filed by all those taxpayers who have either a non-U.S. sole proprietorship reported on Schedule C or non-U.S. rental property reported on Schedule E.

Foreign Branches (FBs) include all qualified business units (QBUs). A QBU is any separate and clearly identified unit of a trade or business of a taxpayer, provided that separate books and records are maintained. Therefore, an FB (reported on Form 8858) includes any separate and clearly identified unit of a trade or business of a taxpayer, provided that separate books and records are maintained.

The idea of a Foreign Branch is intended to target big firms (think: Apple opens up an office in Belgium), but in practice, the unintended consequence is that regular individuals are faced with a higher burden of compliance.

We see two requirements to be an FB:

There should be no doubt as to 1). An activity reported on Schedule C or E is clearly a trade or business. But 2) is not as clear. What does it mean that separate books and records are maintained?

In short, a separate set of books and records means that the business activity can be reported or treated separately from the individual’s own personal finances. Even if you haven’t been maintaining actual separate books and records in your own bookkeeping system, that doesn’t prevent the requirement from being applied, as you have been maintaining separate books and records each year you’ve filed your U.S. tax return. You can see the separate record on the Schedule C or Schedule E of that year. Now, the IRS wants more information about the activity than the income statement alone, and that information is reported on Form 8858.

The IRS requires the full set of books and records to be reported to them, rather than just the income statement. This includes, but is not limited to: the income statement, the balance sheet, remittances from the activity to the filer with the foreign currency gain or loss therein, and transactions between the filer and the FB, such as distributions, rents, or compensation paid or received. The IRS estimates the time involved in completing Form 8858 to exceed 10 hours, exclusive of recordkeeping. Failure to file 8858 may include penalties in the form of monetary fines or a reduction of the taxpayer’s foreign tax credit.

The burdens placed by the IRS on taxpayers living abroad are unfortunate, and they always seem to become more complicated rather than less. However, our goal is your compliance with U.S. law, part of which now includes filing Form 8858 for these types of activities. If you choose not to file this form, we leave that to you. You can sign a waiver and self-prepare Form 8858. But our goal is to make you aware of the requirements.