In this discussion, we shall concentrate on the Taxation of LLC’s formed in US by Indian Residents. LLC is the most common form of Business entity formed by Foreigners ( including Indian Residents) when they intend to do business in US.
Taxation of LLC in US formed by Indian Residents
LLC in US is a pass-through tax entity which means that the entity is not taxed directly. Instead, the profits and losses of the business pass through to its owners, who report them in their personal tax returns.
Indian Residents should be aware of the US LLC tax implications in India. The income from the US LLC may still be taxed in India.
A US LLC has to meet following criteria, in order to not be subject to US federal income tax:
Be 100% owned by non-resident alien (either natural or legal persons)
You are a non-resident alien if you are not any of the following:
- A US citizen
- A US permanent resident (i.e., “green card holder”), or
- You have lived in the US enough time to pass the “substantial presence test.”
If any of the above three categories is true for you, then any income generated through an LLC owned by you, will automatically be subject to US tax.
-As a Non-Resident Alien, you will only be taxable on US-Source income which is “effectively connected to a US Trade or Business” (ETBUS). you have to check if you’re ETBUS, and only then check if you have US source income; if both criteria are met, then only you’re liable for US Federal taxes. But, if you are not ETBUS, you are not taxable even if you have US source income.
The regulation does not define ETBUS, and there is no straightforward answer to what constitute ETBUS. The IRS generally, will not rule on whether a foreign person is engaged in ETBUS or whether that ETBUS receives effectively connected Income. However, A careful analysis of prior case laws, as well as various IRS interpretation, chief counsel memos, revenue rulings and the examples found in IRC 1.864-4 points to the fact that a foreign person not physically present in the United States who merely solicits orders from within the United States only through advertising and then sends inventory to the United States in satisfaction of the orders is not likely to be engaged in a trade or business in the United States.
From various discussions, a business is ETBUS only if below facts are applicable to it:
- You have at least one “dependent agent” in the US. Dependent agents are employees or companies that work almost exclusively for you and
- that dependent agent does something substantial to further your business in the US. Purely administrative jobs are not included under this rule.
Non-Resident Alien are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income. Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S., as well as personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a non-resident at the same graduated rates as for a U.S. person.
FDAP income is passive income such as interest, dividends, rents or royalties. This income is taxed at a flat 30% rate unless a tax treaty specifies a lower rate.
Income that residents of India receive for performing personal services in the United States during the tax year as independent contractors or self-employed individuals (independent personal services) is exempt from U.S. income tax if the residents: Are present in the United States for no more than 89 days during the tax year, and do not have a fixed base regularly available to them in the United States for performing the services.
Finally, if you can benefit from an applicable tax treaty, then you’re only subject to US tax if (in addition to being ETBUS) you operate in the US through a “permanent establishment” (e.g., an office or other fixed place of business).
What is Permanent Establishment – Click Here
Foreigners are only subject to US tax if they are effectively connected to a US Trade or Business (ETBUS). If your business is not ETBUS, even if it generates income in the US, the income is not taxed in the US.
In general, Businesses which are not taxable includes:
- Personal services performed from abroad
- Selling digital products
- Web design etc.
- Selling physical products if the shipping point is from outside of the US.
The Federal Income Tax rate can vary depending on the income of corporations. The rate currently is 21%. This rate depends on the net profit and not on the revenue. It’s the same rate for products and services. 21 % federal tax rate is only for the IRS (the federal government). This is the percentage you could save on taxes on your online business profits, if you form a US LLC for your online business as a non-US resident. Each state will have a different tax rate. In Delaware there is a $300 annual franchise fee tax due on or before June 1 each year.
All goods imported into the United States are subject to custom entry and import duty. However, if you sell goods in the US, you need to pay state sales tax at the rate applicable to the state where the company is located. The State sales tax rate depends on state to state. For instance, in New Jersey, it is 6.625% and for New York, it is 8.875%. It completely depends on the state.
Delaware is one of just a few states that does not have a sales tax on sale of goods or services. However, Delaware does have a gross receipts tax, which is a tax on sellers of goods. The tax is based on a seller’s gross revenues. Rates for the gross receipts tax currently range from .1006% to .7543% depending on the type of business involved.
Sales tax registration is more like getting a unique ID from that state. Let’s say when you register your business in Delaware, you get the federal registration number, the state registration and other documents. But when you are making a sales tax payment in New Jersey, the state doesn’t know who you are, so you need an ID, specifically for New Jersey. It is a one-time process to get the State ID. It is not uncommon for the companies to have sales tax in multiple states and the sales tax registration part is very easy.
Single-member LLCs in the US are considered sole proprietorships. If you own a single-member LLC in the US then you are not required to file the tax return for the LLC. All profits and losses must be reported to the IRS in your personal tax return by filing Form 1040NR. Single owner U.S. LLCs are treated by the IRS as disregarded entities . Foreign owners of U.S. disregarded entities may have no income tax filing requirement (Form 1040NR) if they do not have any U.S. sourced income. ( or if there is no ETBUS)
If the LLC is a partnership, normal partnership tax rules will apply to the LLC and it does not pay its own income taxes and should file a Form 1065 that is U.S. Return of Partnership Income. Each owner should show their pro-rata share of partnership income, credits and deductions on Schedule K-1 (1065). In turn, each LLC member reports this profit and loss information on his or her individual Form 1040, with Schedule E attached.
You must report your taxable income on the basis of a tax year. You can use Calendar year or Fiscal Year as a Tax Year. A Calendar year is 12 consecutive months beginning from January 1 and ending on December 31. A Fiscal year is 12 consecutive months ending on the last day of any month except December. The tax year in the US in most cases is the same as the calendar year
If you are running a service-based business or drop-shipping business (Amazon’s FBA model) from India and do not have a physical presence in the US, then there is a high likelihood that you will NOT have to pay any taxes in the US. You will have to only file an informational tax return in Pro-forma 1120 + 5472 through mail or fax under the EIN of the LLC by April 15 of the following year in the US for disclosure purposes even if they do not owe tax in the US. but your income might only be taxable in India. Meeting notes are not required by law for LLC.
ITIN is needed when a foreign national like an Indian who does not have the right to get the Social Security No. in the US wants to file taxes in the US. For example:- you’re a performing artist who comes over here (a couple of times a year), do the stage shows and make some money or earn some money and now you want to file some taxes, in that case, you have a right to request for an ITIN. So, ITIN is only issued when you intend to file the taxes and the application for ITIN No. is ‘W7 application’ and it is only filed along with the individual person’s federal income tax return.
You’ll also need an ITIN number to get your money back from a local vendor who is withholding taxes for which you must file an individual tax return.
Now we understand that there are only four primary filing requirements that affect foreign-owned, single-member LLCs.
- Form 5472 or Form 1065 (Disclose Information About Certain Reportable Transactions)
- Form 1120
- FBAR (Report of Foreign Bank and Financial Accounts)
- 1040-NR (Income Tax Return)
- For more information on these forms, please click here.
- A sample format of all forms is attached here.
Accounting & Bookkeeping for US LLCs.
There is no legal requirements to submit the accounting of your LLC.
However, we suggest that simple accounting be done showing Profits and Losses from the business. This would also be required to help arrive at individual income and offer for tax in India.
All you need is a simple profit and loss account, that shows incoming and outgoing payments. You can accomplish that by having simple account statements and screenshots of Payment and receipts platforms.
Since you won’t have any tax obligation, when you operate your LLC as a disregarded entity, you won’t have to deal with tax officers or audits.
LLC formation cost: A one-time fee paid to the state to form your LLC.
Wyoming US Business Incorporation
The annual company renewal price could vary based on the state your company is incorporated in.
In Delaware, below are the annual recurring charges:
- Annual franchise tax: An ongoing fee paid to the state to keep your LLC in compliance and good standing on or before June 1 each year.
If LLC is formed before January 1st, 2023, the Franchise Tax will be due on June 1st, 2023.
If formed on or after January 1st, 2023, the Franchise Tax will be due on June 1st, 2024 for the first time.
- Registered Agent Services Cost: Delaware corporations and LLCs are required by law to appoint a registered agent. Cost depends on each registered agent (Starts from $50 per year and becomes due 1 full year after the LLC is incorporated)
To understand US Income Taxation in India – Click Here. To know about annual compliance, you may visit this link.