Are you an expat who owns a foreign business? Filing taxes can already be complicated, but adding a business to the mix can make it even more challenging. If you own a foreign business, you may be required to file Form 8858, the Information Return of US Persons With Respect to Foreign Disregarded Entities and Foreign Branches. But what exactly is a foreign disregarded entity? And what happens if you fail to file? In this article, we’ll cover everything you need to know about Form 8858, address some of the common questions, and help you avoid potential penalties.

What Is IRS Form 8858?
Form 8858 (Information Return of US Persons with Respect to Foreign Disregarded Entities and Foreign Branches) is an informational tax form that certain US citizens and green card holders need to file to disclose if they own a Foreign Disregarded Entity (FDE) or a Foreign Branch (FB), and provide the US with financial information about them.

If you’re scratching your head wondering what that even means, don’t worry – we’ve got you covered. Owning a foreign entity simply means that you own or operate a company in a foreign country. That’s why we will be using the terms entity and company interchangeably.

Form 8858 only serves to provide information to the IRS and does not trigger any additional taxes. However, failure to file may result in substantial penalties, making it all the more important to understand your reporting requirements and take steps to become compliant.

What Is A Foreign Disregarded Entity?
A Foreign Disregarded Entity is an entity that is not established or organized in the United States and is disregarded as an entity separate from its owner for US income tax purposes under Regulations sections 301.7701-2 and 301.7701-3. To be disregarded as a separate entity simply means that your company is not being taxed as a corporation.

So an FDE is a company formed outside of the US that is not being taxed as a foreign corporation. Instead, the owner and the company are treated as a single entity under US law. In other words – the income generated by your FDE is viewed as your own taxable income.

Example: Let’s say that you are a US citizen who owns a small business based in Canada that operates as a single-member LLC. Since the Canadian single-member LLC is not taxed as a corporation, it qualifies as an FDE.
Read More