Hello and thank you for allowing me to assist you.
C Corporation tax laws
Please advise further on whether a C Corp is the better option for us rather than LLC given the issues we are trying to overcome of setting up a US company and paying tax in the UK rather than US.
‘You could be an employee or a shareholder or both. The UK person would not be taxed in the US even as an employee of the US C Corp as long as they have no presence in the US.’
3 Please explain what you mean by ‘no presence’. We would physically be in the UK but trading in the US, using a US PO box address and for some products, using US dropshippers delivering products to US customers. Does this affect anything from the perspective of having a C Corp and being taxed outside of the US? ( I know there are other tax issues from this such as sales tax).
4. ‘Dividends paid to a non US person from a US corp is taxable but the treaty allows a lower rate.’
Are dividends treated differently to salary?
5‘You need to know that a C corp first pays tax on all profits. When those are passed to shareholders those shareholders are taxed again. There is a double taxation in a C corp situation.’
Could profits be reduced by taking larger salaries which would be an expense?
6.Ultimately, we need to find out if the C Corp is the better option for what we want?
7.Please also advise what additional filing requirements there are for a C Corp.
C corp and S corps both can have employees. An S corp is not taxed on it's profits like a C corp but an S corp cannot have foreign members or shareholders.
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet the following requirements:
For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.
The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders.
If you have a UK person you wish to do this business with you cannot have an S corp status.
Please explain what you mean by ‘no presence’.
That relates to that UK person directly. As long as they are not in the US doing any work themself.
Yes. Dividends are not the same as salary. They are a share pf profits.
Yes, salary is an expense to the C corp.
A C corp files a 1120 form, 941 for employment taxes
So if we set up a C Corp, based on the personal situation of both of us (one being a US national but non-resident and the other person being a UK national, both of us living in the UK....
1.Can we take monthly salaries from the business and pay UK tax only?
2.How is this achieved?
3. (a)Does the UK person need to report to the IRS or not? If he does, what reporting is required?
(b) Can the UK person use the W8-BEN form?
4.For myself (US national non-resident) can I still pay UK tax on the salary and claim the US tax exemption through my US tax return?
5. For dividend payments that we take, can we pay UK tax as above?
6. When are filing dates for C Corp or does that depend on the date it is incorporated?
You will still report your US salary but you can claim the salary as foreign earned income using form 2555. The UK person need not report that US salary at all to the US as long as the UK person does not perform any services in the US.
They would complete a W8 form for the C corp to show why no tax withholding on the salary.
You file as usual and can use the form 2555 for foreign earned income exclusion.
The dividends are not earned income so you cannot claim those on 2555. You can claim double tax relief under treaty provisions. You each can use that method.
The corporate income tax return, Form 1120, is due the 15th day of the third month following the close of the taxpayer's tax year; thus, the due date for a calendar-year corporation is March 15th.
You are most welcome.A positive rating is appreciated so I get credit for the response.
To clarify on the point of 'The UK person need not report that US salary at all to the US as long as the UK person does not perform any services in the US'
-Do you mean that as long as he is not physically in the US?
-So he can be an active employee working in the business but as long as he is not physically working in the US it is fine?
-What happens in the event he goes to the US for a holiday, would that mean if he is in the US, he cannot do any work eg check emails etc?
Yes, he cannot be physically in the US and perform services for the "employer" (the C corp).
He cannot work in the US and claim he is exempt from US tax. Fees paid to a resident of the treaty country for services performed in the United States as a director of a U.S. corporation are subject to U.S. tax.
No exemption applies if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States. If he is in the US and works for a US company while in the US he will be taxed in the US.
Ok, so what happens if he wants to go to the US for a vacation? Is he permitted to spend anytime in the US to visit without it becoming a problem for tax?
Yes, but he cannot be there to work or perform work for the employer.
Checking one's e-mail is not working unless their work is to check e-mail. He should really be on vacation.
Is there a time limit on him being in the US each year, eg: no more than x weeks per year or no more than x days per year?
He would not want to be in the US more than 183 days or he will become a tax resident. That would mean his worldwide income is subject to US tax.
You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least:
It is an ongoing calculation, which means that just making sure one is not in the US for the current year more than 183 days is not enough. Coming and going in different years requires the counting of days in 3 year groups.
One more question - if worst case scenrio, one day in the future the business is unsuccessful and we decide to cease trading, can the Corporation be closed?
Does this have any negative impact on us as individuals and is it a difficult or easy process?
Yes it can be closed. The state will have specific forms to file for dissolution. The process will require filing the correct form and making sure the corp does not owe any outstanding taxes.
Does this have any detrimental impact on the individuals?
In the UK, if a Ltd Company is dissolved, it has a negative impact on the directors so I am not sure if there are any related issues in the USA.
No, there is no negative impact when a corp is dissolved. Businesses close for many different reasons. The regulations under IRC section 332 suggest that the status of liquidation exists when the corporation ceases to be a going concern and its activities are merely for the purpose of winding up its affairs, paying its debts, and distributing any remaining balance to its shareholders.
As a general rule, the fair market value of property received by a shareholder via a corporate liquidation less the stock's adjusted basis represents the gain or loss to the shareholder but that is not adverse, it is just distributing items and accounting for the value.