When partnerships include foreign partners, U.S. tax compliance can become complicated. Two essential forms that help partnerships meet their tax obligations are IRS Form 8804 and IRS Form 8805, both of which are required under Section 1446 withholding rules.
These forms are complex, but Gordon Law has helped cross-border businesses navigate intricate tax laws for more than 10 years. This beginner’s guide will explain the purpose of each form, filing requirements, and how they work together to ensure compliance with U.S. tax laws.
Partnership Withholding and Section 1446
Section 1446 of the Internal Revenue Code requires partnerships to withhold tax on foreign partners’ share of the effectively connected taxable income (ECTI) that is derived from U.S. business activities. This withholding ensures that foreign partners pay U.S. taxes on income generated within the country, even if they live abroad.
To comply with this requirement, partnerships must file Form 8804 (a summary of foreign partners’ withholding) and Form 8805 (a withholding statement for each foreign partner).
Pro Tip: IRS Forms 8804 and 8805 are similar to Forms 1042 and 1042-S. Both report on the U.S. income of foreign persons. However, Forms 1042 and 1042-S report passive income, while Forms 8804 and 8805 report partnership income.
Understanding Form 8804
Partnerships use IRS Form 8804, “Annual Return for Partnership Withholding Tax (Section 1446),” to report the total amount of withholding tax they are liable for under Section 1446. This form is filed annually and summarizes the total withholding obligation for all foreign partners in the partnership.
Key information required on Form 8804 includes:
- The partnership’s total effectively connected taxable income (ECTI)
- The total amount of tax withheld on behalf of foreign partners
- The partnership’s tax identification details
Understanding Form 8805
While Form 8804 reports the overall withholding for the partnership, Form 8805 is used to report the specific tax withheld for each individual foreign partner. Each foreign partner receives a copy of Form 8805, which details their share of the ECTI and the tax withheld on their behalf.
Key information required on Form 8805 includes:
- The foreign partner’s name, address, and identification number
- The partner’s share of ECTI
- The amount of tax withheld on the partner’s behalf under Section 1446
Pro Tip: A separate Form 8805 must be completed for each foreign partner and attached to Form 8804, even if no withholding tax is paid. A copy must be provided to both the IRS and the partner.
Withholding Rates Under Section 1446
The withholding tax rate under Section 1446 is generally aligned with the highest tax rate applicable to the type of income being reported.
For most partnerships, the withholding rate on effectively connected taxable income (ECTI) is set at 37% for individual foreign partners and 21% for foreign corporate partners.
However, there are some important exceptions:
- Lower rates may apply if the foreign partner is eligible for a reduced tax rate under an applicable tax treaty. The U.S. has tax treaties with several countries, each with specific nuances.
- Exemptions may also apply if the foreign partner is not subject to U.S. taxation on the income or has filed specific documentation with the IRS.
Pro Tip: Partnerships are responsible for ensuring they withhold at the correct rate, taking into account the partner’s classification (individual or corporate), residency, and any applicable treaty benefits. Failure to apply the correct rate can result in penalties or the need to correct filings later on. If you need help calculating your Section 1446 withholding, reach out to Gordon Law.
Form 8804 and Form 8805 Filing Requirements
Who must file IRS Forms 8804 and 8805?
Any partnership that has foreign partners with income connected to U.S. business activities is required to file Form 8804 and a separate Form 8805 for each foreign partner.
Exceptions to foreign partnership withholding
In some cases, foreign partners may be exempt from withholding under Section 1446. Exemptions can apply if:
- The foreign partner has filed an IRS Form W-8ECI certifying that their income is not subject to U.S. withholding because it is effectively connected with a U.S. trade or business and they are already reporting it on their U.S. tax return.
- The foreign partner is covered by a tax treaty that provides for a reduced withholding rate or exemption from U.S. taxation on certain types of income.
- Certain publicly traded partnerships (PTPs) and qualified investment entities (QIEs) may also be exempt from withholding requirements if specific conditions are met.
It’s important for partnerships to verify the status of each foreign partner to determine whether they qualify for an exemption or reduced withholding rate. Proper documentation, such as Form W-8ECI, should be collected and kept on file to support any exemptions claimed.
Pro Tip: The partnership still must file Form 8805 for each foreign partner. This form reports the foreign partner’s share of U.S. income (ECTI), even if no tax is withheld.
Filing deadlines and payment requirements
Both Forms 8804 and 8805 must be filed by the 15th day of the 4th month after the end of the partnership’s tax year. The typical deadline is April 15 for partnerships operating on a calendar year.
In addition to filing, partnerships are also required to make periodic tax payments throughout the year using Form 8813. These payments are credited against the total tax liability reported on Form 8804 at the end of the tax year.
Late Filing: You can request an extension of time to file using Form 7004. This gives you an extra 6 months to file Forms 8804 and 8805, but you must request an extension before the original deadline. This extension prevents late filing penalties, but not IRS late payment penalties.
Penalties for non-compliance with Section 1446 withholding
Failing to file Forms 8804 and 8805 on time or failing to withhold the correct amount of tax can lead to significant penalties. Partnerships must ensure they meet all filing and payment requirements to avoid these expensive consequences.
- Late filing penalty for Form 8804: The penalty for filing Form 8804 late is 5% of the unpaid tax for each month or part of a month the return is late. This is capped at 25% of the unpaid tax.
- If Form 8804 is filed more than 60 days late, the minimum penalty is $450 or the amount of any tax owed, whichever is smaller.
- Late filing penalty for Form 8805: The penalty for each failure to file a correct Form 8805 is $290, capped at a total of $3,532,500. Remember, you must file Form 8805 for each foreign partner, so these penalties can add up quickly.
- Penalty for failing to provide a correct Form 8805 to foreign partner: Similarly, the penalty for failure to furnish a correct Form 8805 to the recipient is $290 per form, with a maximum penalty of $3,532,500.
- Late payment penalty: The penalty for late tax payments is 0.05% of the unpaid tax for each month or part of a month the payment is late. This is capped at 25% of the unpaid tax.
- Penalty for failure to withhold and pay Section 1446 tax: Any individual who is responsible for the partnership withholding and remitting tax under Section 1446 can be held personally liable for the amount of unpaid tax and penalties. This is known as the Trust Fund Recovery Penalty, covered under IRC Section 6672.
Pro Tip: Penalties may be waived if you can show reasonable cause, but the IRS is strict about the definition of this term. Reach out to our experienced international tax lawyers if you need help with penalties related to Form 8804, Form 8805, and Section 1446 withholding. We’ve eliminated millions in IRS penalties!
How to File Forms 8804 and 8805
The most difficult part of filing these forms is determining how much tax to withhold for each foreign partner under IRC Section 1446. These rates can be affected by tax treaties with other countries and certain withholding exemptions.
If you hire an experienced international tax professional, you can rest assured your withholding is correct and avoid IRS penalties.
Otherwise, filing Forms 8804 and 8805 is straightforward.
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- Form 8805 reports information about the foreign partner, their share of ECTI, and how much tax was withheld.
- Form 8804 reports information about the foreign partnership and summarizes the withholding for each foreign partner.
- Be sure to file these forms by the deadline (typically April 15), or file an extension by the deadline using Form 7004.
Partnerships can file IRS Forms 8804 and 8805 electronically through the IRS FIRE (Filing Information Returns Electronically) system. You can also submit paper copies by mail to:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409
Amended forms
Form 8804 and Form 8805 can be amended if you made a mistake. Before you file amended forms, consult an international tax professional to see if you qualify for penalty abatement.
Need Help with Section 1446 Withholding?
Forms 8804 and 8805 are essential components of U.S. tax compliance for partnerships with foreign partners. By adhering to the Section 1446 withholding requirements, partnerships ensure that foreign partners pay their share of U.S. taxes on income effectively connected to a U.S. business.
Navigating these requirements can be challenging, especially for partnerships with complex structures. Trust the team that’s focused on international tax compliance since 2012, preparing hundreds of complex tax returns like yours. With Gordon Law, you’ll have experienced guidance at your fingertips. You won’t have to worry about IRS penalties since we take care of all your filing requirements!
