About Form 8804, 8805, & Sec. 1446 Withholding Tax (2024)

About Form 8804, 8805, & Sec. 1446 Withholding Tax

About Form 8804, 8805, & Sec. 1446 Withholding Taxes

While there are many international information reporting forms that U.S. taxpayers across the globe must file to report their foreign accounts, assets, investments, etc. — there are also IRS tax forms that U.S. partnerships and entities must file to disclose information about their foreign partners or shareholders. When a partnership includes foreign partners and the partnership has Effectively Connected Taxable Income (ECTI) allocated to foreign partners, Forms 8804 and 8805 are used (as well as other additional forms) to report withholding taxes under Internal Revenue Code Section 1446. It is important to note, that Effectively Connected Taxable Income does not refer to all income but rather taxable income that is effectively connected to the United States — subject to various exceptions, exclusions, and limitations.

First, What is ECTI (Effectively Connected Taxable Income)

First, let’s take a brief look at what the code provides as to the definition of effectively connected taxable income:

• • • ECTI is the excess of the gross income of the partnership that is effectively connected under section 864(c), or treated as effectively connected with the conduct of a U.S. trade or business, over the allowable deductions that are connected to such income. See Pub. 519 for detailed instructions regarding the calculation of ECTI. For purposes of these instructions, figure this income with the following statutory adjustments.

      • Section 703(a)(1) doesn’t apply.

        • The partnership is allowed a deduction for depletion of oil and gas wells, but the amount of the deduction must be determined without regard to sections 613 and 613A.

          • The partnership can’t take into account items of income, gain, loss, or deduction allocable to any partner that isn’t a foreign partner.

26 CFR § 1.1446-2 – Determining a partnership’s effectively connected taxable income

Next, looking at the regulation example provides a good explanation of how the income rules are applied:

Example 1. Limitation on capital losses.

PRS partnership has two equal partners, A and B. A is a nonresident alien and B is a U.S. citizen. A provides PRS with a valid Form W-8BEN, and B provides PRS with a valid Form W-9. PRS has the following annualized tax items for the relevant installment period, all of which are effectively connected with its U.S. trade or business and are allocated equally between A and B: $100 of long-term capital gain, $400 of long-term capital loss, $300 of ordinary income, and $100 of ordinary deductions. Assume that these allocations are respected under section 704(b) and the regulations thereunder. Accordingly, A’s allocable share of PRS’s effectively connected items includes $50 of long-term capital gain, $200 of long-term capital loss, $150 of ordinary income, and $50 of ordinary deductions. In determining A’s allocable share of partnership ECTI, the amount of the long-term capital loss that may be taken into account pursuant to paragraph (b)(3)(v) of this section is limited to A’s allocable share of gain from the sale or exchange of capital assets. Accordingly, A’s share of partnership ECTI allocable under section 704 pursuant to § 1.1446-2 is $100 ($150 of ordinary income less $50 of ordinary deductions, plus $50 of capital gain less $50 of capital loss).

This example is illustrative of the fact that the non-resident alien has to include the portion allocable based on the ownership percentage in the partnership, but there are some limitations when it comes to losses.

• • • • • • $100 LTCG

          • $(400) LTCL

          • $300 OI

          • $100 OD

The Foreign Partner income is allocated as follows:

• • • • • • $150 of OI – $50 of OI deducitons = $100 OI

          • $50 CG – $50 CL = 0 (but the amount of loss is limited by the gain)

What is Section 1446?

Internal Revenue Code section 1446 is an important code section for foreign partners because it requires the withholding of taxes for a foreign partner’s share of ECTI. Foreign Partners provide the partnership with a W-8BEN instead of a W-9 and then the partnership (or withholding agent) is tasked with withholding taxes on the ECTI allocated to the foreign partner. It is important to note, that it is only ECTI is subject to this withholding requirement — which is why it is so important to accurately determine how much effectively connected income there is so that the partnership does not over or under-withhold for the foreign partner.

Walking through Form 8804

Form 8804 can be complicated, but let’s walk through some of the basics to get a general understanding of what taxpayers must provide to timely and accurately file the form.

Part I Partnership

Part 1 of Form 8804 is relatively straightforward and just asks for the name of the partnership, the address of the partnership, and the US Employer Identification Number. If the partnership does not have an EIN then they should go through the procedures to obtain an EIN.

Part II Withholding Agent

The Withholding Agent is required to withhold taxes for a foreign partner’s Effectively Connected Taxable Income. Therefore, the IRS wants to know the name and information of the Withholding Agent, noting that it can be the partnership that is actually the withholding agent, and if so then the filer can just write ‘Same’ for Part II. Otherwise, the partnership must provide information about the withholding agent to the IRS.

Part III Section 1446 Tax Liability and Payments

The withholding requirements are found in Section 1446 and therefore form 8804 requires a detailed breakdown of the tax liability and payments with respect to the partnership.  First, the partnership must provide the total number of foreign partners along with the number of Form 8805 that are attached to Form 8804. While Form 8804 is used by the partnership to report the withholding, Form 8805 is used for each foreign partner’s information statement for Section 1446 withholding tax. 

The partnership that completes Form 8804 is also required to provide Partner-Level 8804C reduction certificates which may serve to reduce the overall withholding based on partner-level items. (This is beyond the scope of this introductory summary and Taxpayers should be on the lookout for certain partner-level items that may serve to reduce the overall withholding of foreign partners ECT I under section 1446).

After this basic level information is included then the partnership has to determine the total ECTI which is impacted by many different items — and is broken down based on the ECTI allocated to corporate partners versus non-corporate partners.

Form 8805 – Foreign Partner’s Information Statement of Section 1446 Withholding Tax

Each of the foreign partners will also attach an information statement regarding section 1446 withholding tax on Form 8805. This form requires information regarding the partner’s name, identification number, address, and account number if applicable to the specific partnership. Thereafter, the type of partner must be included along with information about the withholding agent.

As provided by the IRS:

• • • If a partnership has gross effectively connected income, it must file a separate Form 8805 for each partner for whom it paid section 1446 tax.

    •  In addition, if the partnership reduces ECTI for state and local income tax deductions permitted under Regulations section 1.1446-6(c)(1)(iii) or relies on a Form 8804-C it receives from a partner to reduce its section 1446 tax, it must complete a Form 8805 for the partner even if no tax is paid on behalf of the partner.

    • The foreign partner must also receive a copy of its Form 8805 by the due date of the partnership return (including extensions). The partnership must also issue a Form 8805 to any U.S. person erroneously subjected to withholding tax by the due date of the partnership return (including extensions).

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.