What Is Form 8858 for Foreign Disregarded Entities?

Form 8858, “Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs),” is an informational document filed with the Internal Revenue Service (IRS). Its purpose is to provide transparency into the financial activities of certain foreign operations owned by U.S. persons. The form gives the IRS visibility into the income, deductions, and overall financial position of these foreign structures. This reporting helps the agency verify that U.S. taxpayers are correctly reporting income from their international activities on their primary tax returns.

Who Must File Form 8858

The obligation to file Form 8858 applies to specific “U.S. persons” with interests in either a Foreign Disregarded Entity (FDE) or a Foreign Branch (FB). For tax purposes, a U.S. person includes citizens, resident aliens, domestic corporations, domestic partnerships, and certain trusts or estates.

An FDE is a business entity organized outside the United States with a single owner, which is not treated as a separate entity from its owner for U.S. tax purposes. This means the FDE’s financial activities are reported directly on the owner’s tax return. A common example is a foreign limited liability company (LLC) with a single owner that has not elected to be treated as a corporation.

A Foreign Branch is not a separate legal entity but is a distinct business operation conducted by a U.S. person in a foreign country. This can include a dedicated office or a fixed place of business through which the U.S. person engages in trade or business.

The filing requirement extends to any U.S. person who is the tax owner of an FDE or directly operates an FB. The obligation also applies to U.S. persons who file Form 5471 for a Controlled Foreign Corporation (CFC) or Form 8865 for a Controlled Foreign Partnership (CFP), if that CFC or CFP is the tax owner of an FDE or operates an FB.

Required Information for Form 8858

The initial part of the form requires general information, including the filer’s identifying details and information about the FDE or FB, such as its name, address, and functional currency. An organization chart must also be attached to illustrate the ownership structure. For dormant FDEs with no financial activity, a simplified summary filing procedure may be available.

Financial information on the schedules must be presented in the entity’s functional currency and then translated into U.S. dollars. The primary schedules require the following information:

• Schedule C: This is the entity’s income statement, which requires a summary of income and expenses. Filers must report gross receipts or sales, cost of goods sold, and various deductions like salaries, rent, and taxes.
• Schedule F: This functions as the balance sheet, presenting the FDE or FB’s financial position at the end of the tax year by listing all assets, liabilities, and owner’s equity.
• Schedule H: This schedule is used to calculate the current earnings and profits (E&P) of the entity. The calculation starts with net income and requires adjustments for items like foreign income taxes and certain non-deductible expenses.
• Schedule M: This discloses transactions that occurred between the FDE or FB and the U.S. person filing the form or other related parties. This includes sales of property, leases, commissions, and other payments.

The Filing Process

Form 8858 must be attached to the filer’s main U.S. income tax or information return for the year, such as a Form 1040 for an individual or a Form 1120 for a corporation. The due date for Form 8858 is the same as the due date for the primary return it accompanies, including any extensions.

A separate form must be filed for each FDE or FB that a U.S. person is required to report. The income or loss calculated on Form 8858 should flow through to the appropriate line on the filer’s main tax return.

Penalties for Non-Compliance

Failure to file Form 8858 on time, or filing a form that is incomplete or inaccurate, can lead to financial penalties under Internal Revenue Code Section 6038. The IRS imposes an initial penalty of $10,000 for each annual accounting period of each FDE or FB for which a failure occurs.

If the required information is not provided within 90 days after the IRS mails a notice of the failure, an additional penalty of $10,000 is assessed. This continuation penalty applies for each 30-day period, or fraction thereof, that the failure continues after the 90-day period has expired, with a maximum additional penalty of $50,000 per return.

Beyond monetary fines, a failure to furnish the required information can result in a 10% reduction of the filer’s foreign tax credits, with further reductions for continued non-compliance. Penalties may be waived if the filer can demonstrate that the failure was due to reasonable cause.