Form 8858 Instructions: Who Files and How to File

Form 8858, “Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs),” is an informational return required by the Internal Revenue Service (IRS). U.S. persons use this form to report the financial activities of their foreign enterprises that are not considered separate legal entities for U.S. tax purposes. This reporting enhances transparency and helps ensure U.S. taxpayers accurately report their worldwide income.

Who is Required to File Form 8858

The requirement to file Form 8858 applies to a “U.S. person,” which includes U.S. citizens, resident aliens, domestic corporations, domestic partnerships, and certain estates and trusts. A U.S. person must file if they are the tax owner of a Foreign Disregarded Entity (FDE) or operate a Foreign Branch (FB). An FDE is a foreign business with a single owner that is not treated as a separate corporation for U.S. tax purposes. A Foreign Branch is a distinct business operation of a U.S. person in a foreign country.

Filing is required for direct owners and for U.S. persons who own an FDE or FB indirectly. This includes partners in a U.S. partnership that owns an FDE or operates an FB. A U.S. person filing Form 5471 for a Controlled Foreign Corporation (CFC) must also file Form 8858 if that CFC owns an FDE or FB.

Information and Documentation to Prepare

To complete Form 8858, a filer must gather specific information about the foreign operation and its U.S. tax owner. This includes the full legal name, address, and any employer identification number for both the FDE or FB and its owner. Filers must also provide operational details, including the principal business activity code, the date the entity was organized, its country of operation, and its functional currency.

The most substantial preparation involves compiling financial data for a complete income statement and balance sheet. This financial information must be translated from the entity’s functional currency and reported in U.S. dollars, conforming with U.S. tax law principles. Finally, the filer must assemble records of all transactions between the FDE or FB and the filer or other related entities.

Completing the Key Schedules

Once the necessary information is gathered, the filer can complete the various schedules of Form 8858. Each schedule provides a comprehensive financial picture of the foreign operation.

Schedule C (Income Statement)

This schedule is the income statement of the FDE or FB, where financial data from the entity’s books is transferred. It requires reporting gross receipts, cost of goods sold, and a detailed breakdown of deductions. The result is the net income or loss of the foreign operation.

Schedule F (Balance Sheet)

Schedule F presents the balance sheet of the FDE or FB as of the end of its accounting period. The assets, liabilities, and owner’s equity are reported here in U.S. dollars. Total assets must equal the total liabilities plus owner’s equity.

Schedule G (Other Information)

Schedule G consists of a series of “yes” or “no” questions about the FDE or FB and its activities. These questions cover topics like whether the entity paid foreign income taxes or had transactions with related parties, providing the IRS with additional context.

Schedule H (Current Earnings and Profits)

Schedule H is used to calculate the current earnings and profits (E&P) of the FDE or FB. E&P is a tax concept that measures the economic income of a business. The calculation starts with the net income from Schedule C and is adjusted for certain items.

Schedule J (Taxes Paid or Accrued)

This schedule is for reporting foreign income, war profits, and excess profits taxes paid or accrued by the FDE or FB. The information is used by the U.S. owner to claim a foreign tax credit on their U.S. income tax return to mitigate double taxation.

Schedule M (Transactions Between FDE/FB and Filer)

Schedule M details transactions between the FDE/FB and the filer or other related parties. The IRS examines these transactions to ensure they are conducted at arm’s length, as required by transfer pricing rules, to prevent the artificial shifting of income between jurisdictions.

Filing Procedures and Due Dates

Form 8858 is not filed as a standalone document but must be attached to the U.S. person’s annual income tax return, such as Form 1040, 1120, or 1065. The due date for Form 8858 is the same as the income tax return to which it is attached, including any extensions.

For most individual taxpayers, the due date is April 15. An automatic two-month extension is available for U.S. citizens and residents residing abroad, and a further extension to October 15 can be requested. The entire tax return package, including Form 8858, is filed according to the instructions for the main tax form.

Penalties for Non-Compliance

Failing to file Form 8858 on time or filing an incomplete form can lead to penalties. The initial penalty is $10,000 for each annual accounting period of each FDE or FB for which a failure occurs. If the IRS sends a notice and the failure continues for more than 90 days, an additional penalty of $10,000 is assessed for each subsequent 30-day period. This continuation penalty is capped at $50,000, bringing the potential total penalty to $60,000 per form per year.

Non-compliance can also result in a 10% reduction of the foreign taxes available for credit, which can increase if the failure continues after IRS notification. Penalties may be waived if the filer can show the failure was due to reasonable cause and not willful neglect. Proving reasonable cause requires demonstrating that the taxpayer exercised ordinary business care and prudence but was still unable to file.