Are you a foreign investor with a US LLC? If so, can you confidently say that you are maximizing your tax liabilities and staying in compliance with both your local government and the US? Unfortunately, international taxation can quickly become complex, especially for non-resident owners.
In this article, we’ll explore how you can legally avoid US tax by leveraging the tax code, including determining when your LLC is considered a disregarded entity, how the nature of your business impacts your taxes, and a quick overview of the tax nuances associated with an LLC structure.

Know If Your LLC is a Disregarded Entity or Subsidiary
Sometimes, LLC owners don’t need to file a separate business tax return. Instead, all transactions will be reported on another business that owns the LLC. For example, let’s say you have an LLC and another business set up as an s corporation. Your s corporation owns 100% of the LLC. In this scenario, your LLC will be considered a subsidiary and reported on your s corporation’s business tax return.
Another common scenario appears in single-member LLCs. In this structure, your LLC is not a separate entity in the eyes of the IRS. As a result, all income or loss will be reported directly on your US individual income tax return, eliminating the need to file a separate business income tax return.
Knowing how your LLC income should be reported is crucial to avoiding unforeseen fines and penalties. In most cases, you will choose your entity classification in the incorporation phase. Remember, multi-member LLCs automatically have to file a business income tax return to properly divide income or loss between members. The same is true for LLCs that elect to be taxed as corporations.
LLCs that generate US-sourced income but have foreign shareholders will be required to remit additional information on the tax return, such as Form 5471 and Form 5472. In addition, you may be required to file Form 1040NR, which is the non-resident individual income tax return, if you receive pass-through income with US-sourced components.

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Optimize Your Business Deductions
As a non-resident LLC owner, it’s important that you understand how to leverage the US tax code to minimize your income taxes. LLC business owners are usually only taxed on net profit. This means you can deduct qualifying business expenses to lower your taxable income and reduce your liability.
A qualifying business deduction, according to Publication 535, is a cost that is ordinary, necessary, and reasonable. Any expense that relates to your business operations will qualify. For example, if you pay an individual to manage your business, these costs would be a deduction against your gross revenue.
Other common costs include insurance, bank fees, advertising, wages, repairs, maintenance, supplies, materials, freight, and office expenses. In addition to general business deductions, there are tax-specific deductions that you can use. Single-member LLCs that file Form 1040NR will be able to take the Qualifying Business Income Deduction (QBID), which is an automatic 20% reduction of your net income.
Let’s say that you had $20,000 of gross revenue and $15,000 of business expenses. This leaves your net income at $5,000. Instead of paying taxes on the full $5,000, your taxable income drops to $4,000 with the QBID. There are income limits to the QBID for non-resident shareholders, so be sure you check with a tax accountant.
There’s a difference between tax avoidance and tax evasion. Tax avoidance is finding legal ways to lower your income taxes, while tax evasion is an intentional underpayment of taxes. When it comes to your taxes as a non-resident LLC owner, it’s important that you stay within the realms of tax avoidance. You don’t want to put your business operations at risk by underpaying your taxes.
Determine the Nature of Your Business Activities
Your business activities will determine what types of taxes and forms you will be required to file. However, even if you don’t have a physical warehouse or office location stateside, you might still be subject to US taxation, depending on the sources of your income. Let’s break down how the taxing location is determined for each source of income:

• Business Income: Personal Services – Where service is performed
• Business Income: Sales of Inventory – Where item is sold
• Interest – Residence of payer
• Dividends – Depends on if the corporation is US or foreign
• Rental Income – Location of property
• Royalties: Patents, Copyrights, Trademarks, etc. – Where property is used
• Sale of Real Property – Location of property

Knowing the sources of your sales is critical to file your domestic and US tax returns with the proper sales allocated to each country. You might find that you have no income that is US-sourced. In this case, you won’t have to pay any US income tax.

The nature of your business activities might also trigger state tax filing obligations. The good news is that most states have nexus thresholds. This means you aren’t required to file and pay state tax unless your sales exceed the threshold. Nevertheless, your accounting system should be optimized to differentiate between US and foreign sales and have the capability to calculate the sales to each state.

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Understand International Tax Agreements and Double Taxation
There are numerous taxes that your business might be subject to, including income tax, payroll tax, sales tax, franchise tax, and excise tax. However, this doesn’t mean that you will be required to file and pay these taxes like a domestic LLC owner would. In fact, the US has dozens of tax treaties that minimize taxes for non-resident business owners. The IRS has a comprehensive list of all income tax treaties, which you can find here.
Nevertheless, a major concern of non-resident LLC owners is double taxation. Some double taxation is inevitable, especially for owners of LLCs taxed as corporations. First, you might need to pay US tax on profits from your LLC. Then, some dividend payments will also be taxable.
However, there are ways you can avoid being taxed on your LLC profits twice: once in your home country and again in the US. This relies on breaking out your income by source. For example, what sales amount is US sourced? This should be your starting amount. You can then reduce your income by taking US deductions.
In addition, if you already paid taxes on the US-sourced income in your home country, you might be able to claim an offsetting credit. The same is generally true for foreign income taxed at the US level. The treaties in place will dictate the deductibility of taxes paid to other jurisdictions.

Evaluating if an LLC is the Right Structure
Holding an LLC as a non-resident comes with both pros and cons. For one, LLCs are relatively simple to set up and manage. The entire LLC formation process can be done in as little as a few hours. Moreover, the main advantage of holding an LLC is limited personal liability from creditors and lawsuits. If you were to be sued, the plaintiff could only go after your LLC or your personal assets, not both.
For non-resident LLC owners, this business structure also provides access to the US banking system. The US has dozens of reputable banks, creditors, and lenders, which can all be accessed by forming an LLC. Furthermore, the US does have treaties and policies in place that attract non-resident LLC owners. This allows you to minimize your tax liability and avoid double taxation.
There are some disadvantages of LLCs to be aware of. First, single-member LLCs can have the corporate veil easily pierced. This means that the lines between business activities and personal activities are blurred, which gives the courts access to personal assets in a lawsuit. You can reduce your risk of piercing the corporate veil by having proper bookkeeping procedures in place.
Another disadvantage of running an LLC as a non-resident can be taxation. There are multiple different types of taxes that your LLC could be subject to. Knowing when an income tax or sales tax nexus is triggered can be extremely difficult without boots on the ground and expert oversight. This can cause problems with both the IRS and regulatory agencies. Moreover, it can be costly to prepare and file international returns, so plan on an increase in legal and professional fees.

Summary
Staying on top of your US LLC filing obligations as a non-resident is important. You don’t want to be blindsided by an unexpected tax bill, especially if there are ways you can legally reduce your liability. Regardless of whether this is your first year holding a US LLC or your LLC has been thriving for a few years now, it’s important to review your sources of income.
You might find that you’ve been handling income allocation wrong or neglecting to maximize your deductions. Whatever the case, it’s critical that you start thinking about your LLC taxes well before year-end hits. Check out our other blog posts on non-resident taxes for more information on filing obligations, due dates, and best practices.

Prepared by EDEAL.AI