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1040nr ez online 1. 1040nr ez online   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. 1040nr ez online At-risk limits. 1040nr ez online Passive activities. 1040nr ez online Net operating loss. 1040nr ez online When Can I Deduct an Expense?Economic performance. 1040nr ez online Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. 1040nr ez online  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. 1040nr ez online See Optional safe harbor method under Business use of your home , later. 1040nr ez online Introduction This chapter covers the general rules for deducting business expenses. 1040nr ez online Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. 1040nr ez online Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. 1040nr ez online What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. 1040nr ez online An ordinary expense is one that is common and accepted in your industry. 1040nr ez online A necessary expense is one that is helpful and appropriate for your trade or business. 1040nr ez online An expense does not have to be indispensable to be considered necessary. 1040nr ez online Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. 1040nr ez online In some cases you may not be allowed to deduct the expense at all. 1040nr ez online Therefore, it is important to distinguish usual business expenses from expenses that include the following. 1040nr ez online The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. 1040nr ez online Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. 1040nr ez online Some of your business expenses may be included in figuring cost of goods sold. 1040nr ez online Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. 1040nr ez online If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. 1040nr ez online The following are types of expenses that go into figuring cost of goods sold. 1040nr ez online The cost of products or raw materials, including freight. 1040nr ez online Storage. 1040nr ez online Direct labor (including contributions to pension or annuity plans) for workers who produce the products. 1040nr ez online Factory overhead. 1040nr ez online Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. 1040nr ez online Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. 1040nr ez online This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. 1040nr ez online For more information, see the following sources. 1040nr ez online Cost of goods sold—chapter 6 of Publication 334. 1040nr ez online Inventories—Publication 538. 1040nr ez online Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. 1040nr ez online Capital Expenses You must capitalize, rather than deduct, some costs. 1040nr ez online These costs are a part of your investment in your business and are called “capital expenses. 1040nr ez online ” Capital expenses are considered assets in your business. 1040nr ez online In general, you capitalize three types of costs. 1040nr ez online Business start-up costs (See Tip below). 1040nr ez online Business assets. 1040nr ez online Improvements. 1040nr ez online You can elect to deduct or amortize certain business start-up costs. 1040nr ez online See chapters 7 and 8. 1040nr ez online Cost recovery. 1040nr ez online   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. 1040nr ez online These recovery methods allow you to deduct part of your cost each year. 1040nr ez online In this way, you are able to recover your capital expense. 1040nr ez online See Amortization (chapter 8) and Depletion (chapter 9) in this publication. 1040nr ez online A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. 1040nr ez online A greater portion of these costs can be deducted if the property is qualified disaster assistance property. 1040nr ez online See Publication 946 for details. 1040nr ez online Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. 1040nr ez online These costs may include expenses for advertising, travel, or wages for training employees. 1040nr ez online If you go into business. 1040nr ez online   When you go into business, treat all costs you had to get your business started as capital expenses. 1040nr ez online   Usually you recover costs for a particular asset through depreciation. 1040nr ez online Generally, you cannot recover other costs until you sell the business or otherwise go out of business. 1040nr ez online However, you can choose to amortize certain costs for setting up your business. 1040nr ez online See Starting a Business in chapter 8 for more information on business start-up costs. 1040nr ez online If your attempt to go into business is unsuccessful. 1040nr ez online   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. 1040nr ez online The costs you had before making a decision to acquire or begin a specific business. 1040nr ez online These costs are personal and nondeductible. 1040nr ez online They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. 1040nr ez online The costs you had in your attempt to acquire or begin a specific business. 1040nr ez online These costs are capital expenses and you can deduct them as a capital loss. 1040nr ez online   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. 1040nr ez online   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. 1040nr ez online You cannot take a deduction for these costs. 1040nr ez online You will recover the costs of these assets when you dispose of them. 1040nr ez online Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. 1040nr ez online You must fully capitalize the cost of these assets, including freight and installation charges. 1040nr ez online Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. 1040nr ez online See Regulations section 1. 1040nr ez online 263A-2 for information on these rules. 1040nr ez online Improvements Improvements are generally major expenditures. 1040nr ez online Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. 1040nr ez online The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. 1040nr ez online Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. 1040nr ez online Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. 1040nr ez online However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. 1040nr ez online Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. 1040nr ez online Restoration plan. 1040nr ez online   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. 1040nr ez online This applies even if some of the work would by itself be classified as repairs. 1040nr ez online Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. 1040nr ez online Motor vehicles. 1040nr ez online   You usually capitalize the cost of a motor vehicle you use in your business. 1040nr ez online You can recover its cost through annual deductions for depreciation. 1040nr ez online   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. 1040nr ez online See Publication 463. 1040nr ez online   Generally, repairs you make to your business vehicle are currently deductible. 1040nr ez online However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. 1040nr ez online Roads and driveways. 1040nr ez online    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. 1040nr ez online The cost of maintaining a private road on your business property is a deductible expense. 1040nr ez online Tools. 1040nr ez online   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. 1040nr ez online Machinery parts. 1040nr ez online   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. 1040nr ez online Heating equipment. 1040nr ez online   The cost of changing from one heating system to another is a capital expense. 1040nr ez online Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. 1040nr ez online However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. 1040nr ez online You can deduct the business part. 1040nr ez online For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. 1040nr ez online The remaining 30% is personal interest and generally is not deductible. 1040nr ez online See chapter 4 for information on deducting interest and the allocation rules. 1040nr ez online Business use of your home. 1040nr ez online   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. 1040nr ez online These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. 1040nr ez online   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. 1040nr ez online The business part of your home must be used exclusively and regularly for your trade or business. 1040nr ez online The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. 1040nr ez online   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. 1040nr ez online   Your home office qualifies as your principal place of business if you meet the following requirements. 1040nr ez online You use the office exclusively and regularly for administrative or management activities of your trade or business. 1040nr ez online You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 1040nr ez online   If you have more than one business location, determine your principal place of business based on the following factors. 1040nr ez online The relative importance of the activities performed at each location. 1040nr ez online If the relative importance factor does not determine your principal place of business, consider the time spent at each location. 1040nr ez online Optional safe harbor method. 1040nr ez online   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. 1040nr ez online This method is an alternative to the calculation, allocation, and substantiation of actual expenses. 1040nr ez online   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. 1040nr ez online Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). 1040nr ez online You are not required to allocate these deductions between personal and business use, as is required under the regular method. 1040nr ez online If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. 1040nr ez online   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. 1040nr ez online All of the requirements discussed earlier under Business use of your home still apply. 1040nr ez online   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. 1040nr ez online    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. 1040nr ez online Business use of your car. 1040nr ez online   If you use your car exclusively in your business, you can deduct car expenses. 1040nr ez online If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. 1040nr ez online Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. 1040nr ez online   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. 1040nr ez online Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. 1040nr ez online Beginning in 2013, the standard mileage rate is 56. 1040nr ez online 5 cents per mile. 1040nr ez online   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. 1040nr ez online   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. 1040nr ez online How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. 1040nr ez online Recovery of amount deducted (tax benefit rule). 1040nr ez online   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. 1040nr ez online If you have a recovery in a later year, include the recovered amount in income in that year. 1040nr ez online However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. 1040nr ez online   For more information on recoveries and the tax benefit rule, see Publication 525. 1040nr ez online Payments in kind. 1040nr ez online   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. 1040nr ez online You cannot deduct the cost of your own labor. 1040nr ez online   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. 1040nr ez online If these costs are included in the cost of goods sold, do not deduct them again as a business expense. 1040nr ez online Limits on losses. 1040nr ez online   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. 1040nr ez online There may be limits on how much of the loss you can deduct. 1040nr ez online Not-for-profit limits. 1040nr ez online   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. 1040nr ez online See Not-for-Profit Activities , later. 1040nr ez online At-risk limits. 1040nr ez online   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. 1040nr ez online You are at risk in any activity for the following. 1040nr ez online The money and adjusted basis of property you contribute to the activity. 1040nr ez online Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. 1040nr ez online For more information, see Publication 925. 1040nr ez online Passive activities. 1040nr ez online   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. 1040nr ez online In general, deductions for losses from passive activities only offset income from passive activities. 1040nr ez online You cannot use any excess deductions to offset other income. 1040nr ez online In addition, passive activity credits can only offset the tax on net passive income. 1040nr ez online Any excess loss or credits are carried over to later years. 1040nr ez online Suspended passive losses are fully deductible in the year you completely dispose of the activity. 1040nr ez online For more information, see Publication 925. 1040nr ez online Net operating loss. 1040nr ez online   If your deductions are more than your income for the year, you may have a “net operating loss. 1040nr ez online ” You can use a net operating loss to lower your taxes in other years. 1040nr ez online See Publication 536 for more information. 1040nr ez online   See Publication 542 for information about net operating losses of corporations. 1040nr ez online When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. 1040nr ez online An accounting method is a set of rules used to determine when and how income and expenses are reported. 1040nr ez online The two basic methods are the cash method and the accrual method. 1040nr ez online Whichever method you choose must clearly reflect income. 1040nr ez online For more information on accounting methods, see Publication 538. 1040nr ez online Cash method. 1040nr ez online   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. 1040nr ez online Accrual method. 1040nr ez online   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. 1040nr ez online The all-events test has been met. 1040nr ez online The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. 1040nr ez online Economic performance has occurred. 1040nr ez online Economic performance. 1040nr ez online   You generally cannot deduct or capitalize a business expense until economic performance occurs. 1040nr ez online If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. 1040nr ez online If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 1040nr ez online Example. 1040nr ez online Your tax year is the calendar year. 1040nr ez online In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. 1040nr ez online You paid it by check in January 2014. 1040nr ez online If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. 1040nr ez online If you use the cash method of accounting, deduct the expense on your 2014 return. 1040nr ez online Prepayment. 1040nr ez online   You generally cannot deduct expenses in advance, even if you pay them in advance. 1040nr ez online This rule applies to both the cash and accrual methods. 1040nr ez online It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 1040nr ez online Example. 1040nr ez online In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. 1040nr ez online Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. 1040nr ez online You can deduct the rent for 2014 and 2015 on your tax returns for those years. 1040nr ez online Contested liability. 1040nr ez online   Under the cash method, you can deduct a contested liability only in the year you pay the liability. 1040nr ez online Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. 1040nr ez online S. 1040nr ez online possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. 1040nr ez online However, to take the deduction in the year of payment or transfer, you must meet certain conditions. 1040nr ez online See Regulations section 1. 1040nr ez online 461-2. 1040nr ez online Related person. 1040nr ez online   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. 1040nr ez online However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. 1040nr ez online Your deduction is allowed when the amount is includible in income by the related cash method payee. 1040nr ez online See Related Persons in Publication 538. 1040nr ez online Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. 1040nr ez online Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. 1040nr ez online The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. 1040nr ez online It does not apply to corporations other than S corporations. 1040nr ez online In determining whether you are carrying on an activity for profit, several factors are taken into account. 1040nr ez online No one factor alone is decisive. 1040nr ez online Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. 1040nr ez online Presumption of profit. 1040nr ez online   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. 1040nr ez online Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. 1040nr ez online The activity must be substantially the same for each year within this period. 1040nr ez online You have a profit when the gross income from an activity exceeds the deductions. 1040nr ez online   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. 1040nr ez online   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. 1040nr ez online This means the limits discussed here will not apply. 1040nr ez online You can take all your business deductions from the activity, even for the years that you have a loss. 1040nr ez online You can rely on this presumption unless the IRS later shows it to be invalid. 1040nr ez online Using the presumption later. 1040nr ez online   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. 1040nr ez online   You can elect to do this by filing Form 5213. 1040nr ez online Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. 1040nr ez online   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. 1040nr ez online Accordingly, it will not restrict your deductions. 1040nr ez online Rather, you will gain time to earn a profit in the required number of years. 1040nr ez online If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. 1040nr ez online If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. 1040nr ez online   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. 1040nr ez online The period is extended only for deductions of the activity and any related deductions that might be affected. 1040nr ez online    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. 1040nr ez online Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. 1040nr ez online Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. 1040nr ez online You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. 1040nr ez online However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. 1040nr ez online Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. 1040nr ez online If you are an individual, these deductions may be taken only if you itemize. 1040nr ez online These deductions may be taken on Schedule A (Form 1040). 1040nr ez online Category 1. 1040nr ez online   Deductions you can take for personal as well as for business activities are allowed in full. 1040nr ez online For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. 1040nr ez online Deduct them on the appropriate lines of Schedule A (Form 1040). 1040nr ez online For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). 1040nr ez online The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. 1040nr ez online The reduction amount returns to $100 for tax years beginning after December 31, 2009. 1040nr ez online See Publication 547 for more information on casualty losses. 1040nr ez online For the limits that apply to home mortgage interest, see Publication 936. 1040nr ez online Category 2. 1040nr ez online   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. 1040nr ez online Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. 1040nr ez online Category 3. 1040nr ez online   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. 1040nr ez online Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. 1040nr ez online Where more than one asset is involved, allocate depreciation and these other deductions proportionally. 1040nr ez online    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). 1040nr ez online They are subject to the 2%-of-adjusted-gross-income limit. 1040nr ez online See Publication 529 for information on this limit. 1040nr ez online Example. 1040nr ez online Adriana is engaged in a not-for-profit activity. 1040nr ez online The income and expenses of the activity are as follows. 1040nr ez online Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. 1040nr ez online The limit is reached in category (3), as follows. 1040nr ez online Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. 1040nr ez online $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. 1040nr ez online Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. 1040nr ez online The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). 1040nr ez online Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. 1040nr ez online Partnerships and S corporations. 1040nr ez online   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. 1040nr ez online They are reflected in the individual shareholder's or partner's distributive shares. 1040nr ez online More than one activity. 1040nr ez online   If you have several undertakings, each may be a separate activity or several undertakings may be combined. 1040nr ez online The following are the most significant facts and circumstances in making this determination. 1040nr ez online The degree of organizational and economic interrelationship of various undertakings. 1040nr ez online The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. 1040nr ez online The similarity of the undertakings. 1040nr ez online   The IRS will generally accept your characterization if it is supported by facts and circumstances. 1040nr ez online    If you are carrying on two or more different activities, keep the deductions and income from each one separate. 1040nr ez online Figure separately whether each is a not-for-profit activity. 1040nr ez online Then figure the limit on deductions and losses separately for each activity that is not for profit. 1040nr ez online Prev  Up  Next   Home   More Online 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1040nr ez online Publication 515 - Main Content Table of Contents Withholding of TaxWithholding Agent Withholding and Reporting Obligations Persons Subject to NRA WithholdingIdentifying the Payee Foreign Persons DocumentationBeneficial Owners Foreign Intermediaries and Foreign Flow-Through Entities Standards of Knowledge Presumption Rules Income Subject to NRA WithholdingSource of Income Fixed or Determinable Annual or Periodical Income (FDAP) Withholding on Specific IncomeEffectively Connected Income Income Not Effectively Connected Pay for Personal Services Performed Artists and Athletes (Income Codes 42 and 43) Other Income Foreign Governments and Certain Other Foreign Organizations U. 1040nr ez online S. 1040nr ez online Taxpayer Identification NumbersUnexpected payment. 1040nr ez online Depositing Withheld TaxesWhen Deposits Are Required Adjustment for Overwithholding Returns RequiredJoint owners. 1040nr ez online Electronic reporting. 1040nr ez online Partnership Withholding on Effectively Connected IncomeWho Must Withhold Foreign Partner Publicly Traded Partnerships U. 1040nr ez online S. 1040nr ez online Real Property InterestForeign corporations. 1040nr ez online Domestic corporations. 1040nr ez online U. 1040nr ez online S. 1040nr ez online real property holding corporations. 1040nr ez online Partnerships. 1040nr ez online Trusts and estates. 1040nr ez online Domestically controlled QIE. 1040nr ez online Late filing of certifications or notices. 1040nr ez online Certifications. 1040nr ez online Liability of agent or qualified substitute. 1040nr ez online Reporting and Paying the Tax Withholding Certificates Tax Treaty TablesTable 1 Table 2 Table 3 How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). 1040nr ez online Withholding of Tax In most cases, a foreign person is subject to U. 1040nr ez online S. 1040nr ez online tax on its U. 1040nr ez online S. 1040nr ez online source income. 1040nr ez online Most types of U. 1040nr ez online S. 1040nr ez online source income received by a foreign person are subject to U. 1040nr ez online S. 1040nr ez online tax of 30%. 1040nr ez online A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. 1040nr ez online The tax is generally withheld (NRA withholding) from the payment made to the foreign person. 1040nr ez online The term “NRA withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. 1040nr ez online In most cases, NRA withholding describes the withholding regime that requires withholding on a payment of U. 1040nr ez online S. 1040nr ez online source income. 1040nr ez online Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to NRA withholding. 1040nr ez online NRA withholding does not include withholding under section 1445 of the Code (see U. 1040nr ez online S. 1040nr ez online Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income , later). 1040nr ez online A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. 1040nr ez online However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U. 1040nr ez online S. 1040nr ez online person is not required to withhold. 1040nr ez online In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding. 1040nr ez online Withholding Agent You are a withholding agent if you are a U. 1040nr ez online S. 1040nr ez online or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. 1040nr ez online A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U. 1040nr ez online S. 1040nr ez online branch of certain foreign banks and insurance companies. 1040nr ez online You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment. 1040nr ez online Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. 1040nr ez online In most cases, the U. 1040nr ez online S. 1040nr ez online person who pays an amount subject to NRA withholding is the person responsible for withholding. 1040nr ez online However, other persons may be required to withhold. 1040nr ez online For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. 1040nr ez online In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later. 1040nr ez online Liability for tax. 1040nr ez online   As a withholding agent, you are personally liable for any tax required to be withheld. 1040nr ez online This liability is independent of the tax liability of the foreign person to whom the payment is made. 1040nr ez online If you fail to withhold and the foreign payee fails to satisfy its U. 1040nr ez online S. 1040nr ez online tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties. 1040nr ez online   The applicable tax will be collected only once. 1040nr ez online If the foreign person satisfies its U. 1040nr ez online S. 1040nr ez online tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold. 1040nr ez online Determination of amount to withhold. 1040nr ez online   You must withhold on the gross amount subject to NRA withholding. 1040nr ez online You cannot reduce the gross amount by any deductions. 1040nr ez online However, see Scholarships and Fellowship Grants and Pay for Personal Services Performed , later, for when a deduction for a personal exemption may be allowed. 1040nr ez online   If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. 1040nr ez online In no case, however, should you withhold more than 30% of the total amount paid. 1040nr ez online Or, you may make a reasonable estimate of the amount from U. 1040nr ez online S. 1040nr ez online sources and put a corresponding part of the amount due in escrow until the amount from U. 1040nr ez online S. 1040nr ez online sources can be determined, at which time withholding becomes due. 1040nr ez online When to withhold. 1040nr ez online   Withholding is required at the time you make a payment of an amount subject to withholding. 1040nr ez online A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. 1040nr ez online A payment is considered made to a person if it is paid for that person's benefit. 1040nr ez online For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. 1040nr ez online A payment also is considered made to a person if it is made to that person's agent. 1040nr ez online   A U. 1040nr ez online S. 1040nr ez online partnership should withhold when any distributions that include amounts subject to withholding are made. 1040nr ez online However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U. 1040nr ez online S. 1040nr ez online partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. 1040nr ez online If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income , later. 1040nr ez online A U. 1040nr ez online S. 1040nr ez online trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. 1040nr ez online To the extent a U. 1040nr ez online S. 1040nr ez online trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S. 1040nr ez online Withholding and Reporting Obligations You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. 1040nr ez online (See Returns Required , later. 1040nr ez online ) An exception from reporting may apply to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business. 1040nr ez online Form 1099 reporting and backup withholding. 1040nr ez online    You also may be responsible as a payer for reporting on Form 1099 payments made to a U. 1040nr ez online S. 1040nr ez online person. 1040nr ez online You must withhold 28% (backup withholding rate) from a reportable payment made to a U. 1040nr ez online S. 1040nr ez online person that is subject to Form 1099 reporting if any of the following apply. 1040nr ez online The U. 1040nr ez online S. 1040nr ez online person has not provided its taxpayer identification number (TIN) in the manner required. 1040nr ez online The IRS notifies you that the TIN furnished by the payee is incorrect. 1040nr ez online There has been a notified payee underreporting. 1040nr ez online There has been a payee certification failure. 1040nr ez online In most cases, a TIN must be provided by a U. 1040nr ez online S. 1040nr ez online non-exempt recipient on Form W-9, Request for Taxpayer Identification Number and Certification. 1040nr ez online A payer files a tax return on Form 945, Annual Return of Withheld Federal Income Tax, for backup withholding. 1040nr ez online You may be required to file Form 1099 and, if appropriate, backup withhold, even if you do not make the payments directly to that U. 1040nr ez online S. 1040nr ez online person. 1040nr ez online For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U. 1040nr ez online S. 1040nr ez online person subject to Form 1099 reporting. 1040nr ez online See Identifying the Payee , later, for more information. 1040nr ez online Also see Section S. 1040nr ez online Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Certain Information Returns. 1040nr ez online Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting. 1040nr ez online Wages paid to employees. 1040nr ez online   If you are the employer of a nonresident alien, you generally must withhold taxes at graduated rates. 1040nr ez online See Pay for Personal Services Performed , later. 1040nr ez online Effectively connected income by partnerships. 1040nr ez online   A withholding agent that is a partnership (whether U. 1040nr ez online S. 1040nr ez online or foreign) is also responsible for withholding on its income effectively connected with a U. 1040nr ez online S. 1040nr ez online trade or business that is allocable to foreign partners. 1040nr ez online See Partnership Withholding on Effectively Connected Income , later, for more information. 1040nr ez online U. 1040nr ez online S. 1040nr ez online real property interest. 1040nr ez online   A withholding agent also may be responsible for withholding if a foreign person transfers a U. 1040nr ez online S. 1040nr ez online real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U. 1040nr ez online S. 1040nr ez online real property interest to a shareholder, partner, or beneficiary that is a foreign person. 1040nr ez online See U. 1040nr ez online S. 1040nr ez online Real Property Interest , later. 1040nr ez online Persons Subject to NRA Withholding NRA withholding applies only to payments made to a payee that is a foreign person. 1040nr ez online It does not apply to payments made to U. 1040nr ez online S. 1040nr ez online persons. 1040nr ez online Usually, you determine the payee's status as a U. 1040nr ez online S. 1040nr ez online or foreign person based on the documentation that person provides. 1040nr ez online See Documentation , later. 1040nr ez online However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation, then you must apply certain presumption rules, discussed later. 1040nr ez online Identifying the Payee In most cases, the payee is the person to whom you make the payment, regardless of whether that person is the beneficial owner of the income. 1040nr ez online However, there are situations in which the payee is a person other than the one to whom you actually make a payment. 1040nr ez online U. 1040nr ez online S. 1040nr ez online agent of foreign person. 1040nr ez online   If you make a payment to a U. 1040nr ez online S. 1040nr ez online person and you have actual knowledge that the U. 1040nr ez online S. 1040nr ez online person is receiving the payment as an agent of a foreign person, you must treat the payment as made to the foreign person. 1040nr ez online However, if the U. 1040nr ez online S. 1040nr ez online person is a financial institution, you may treat the institution as the payee provided you have no reason to believe that the institution will not comply with its own obligation to withhold. 1040nr ez online   If the payment is not subject to NRA withholding (for example, gross proceeds from the sales of securities), you must treat the payment as made to a U. 1040nr ez online S. 1040nr ez online person and not as a payment to a foreign person. 1040nr ez online You may be required to report the payment on Form 1099 and, if applicable, backup withhold. 1040nr ez online Disregarded entities. 1040nr ez online   A business entity that is not a corporation and that has a single owner may be disregarded as an entity separate from its owner (a disregarded entity) for federal tax purposes. 1040nr ez online The payee of a payment made to a disregarded entity is the owner of the entity. 1040nr ez online   If the owner of the entity is a foreign person, you must apply NRA withholding unless you can treat the foreign owner as a beneficial owner entitled to a reduced rate of withholding. 1040nr ez online   If the owner is a U. 1040nr ez online S. 1040nr ez online person, you do not apply NRA withholding. 1040nr ez online However, you may be required to report the payment on Form 1099 and, if applicable, backup withhold. 1040nr ez online You may assume that a foreign entity is not a disregarded entity unless you can reliably associate the payment with documentation provided by the owner or you have actual knowledge or reason to know that the foreign entity is a disregarded entity. 1040nr ez online Flow-Through Entities The payees of payments (other than income effectively connected with a U. 1040nr ez online S. 1040nr ez online trade or business) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. 1040nr ez online This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. 1040nr ez online Income that is, or is deemed to be, effectively connected with the conduct of a U. 1040nr ez online S. 1040nr ez online trade or business of a flow-through entity is treated as paid to the entity. 1040nr ez online All of the following are flow-through entities. 1040nr ez online A foreign partnership (other than a withholding foreign partnership). 1040nr ez online A foreign simple or foreign grantor trust (other than a withholding foreign trust). 1040nr ez online A fiscally transparent entity receiving income for which treaty benefits are claimed. 1040nr ez online See Fiscally transparent entity , later. 1040nr ez online In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation , later) on which it claims such status. 1040nr ez online You also may be required to treat the entity as a flow-through entity under the presumption rules, discussed later. 1040nr ez online You must determine whether the owners or beneficiaries of a flow-through entity are U. 1040nr ez online S. 1040nr ez online or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of NRA withholding applies. 1040nr ez online You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. 1040nr ez online If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. 1040nr ez online See Documentation and Presumption Rules , later. 1040nr ez online Withholding foreign partnerships and withholding foreign trusts are not flow-through entities. 1040nr ez online Foreign partnerships. 1040nr ez online    A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. 1040nr ez online If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves a flow-through entity or a foreign intermediary. 1040nr ez online However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. 1040nr ez online If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees. 1040nr ez online Example 1. 1040nr ez online A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation; and a U. 1040nr ez online S. 1040nr ez online citizen. 1040nr ez online You make a payment of U. 1040nr ez online S. 1040nr ez online source interest to the partnership. 1040nr ez online It gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien; Form W-8BEN from the foreign corporation; and Form W-9 from the U. 1040nr ez online S. 1040nr ez online citizen. 1040nr ez online The partnership also gives you a complete withholding statement that enables you to associate a part of the interest payment to each partner. 1040nr ez online You must treat all three partners as the payees of the interest payment as if the payment were made directly to them. 1040nr ez online Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S. 1040nr ez online Report the payment to the U. 1040nr ez online S. 1040nr ez online citizen on Form 1099-INT. 1040nr ez online Example 2. 1040nr ez online A nonwithholding foreign partnership has two partners: a foreign corporation and a nonwithholding foreign partnership. 1040nr ez online The second partnership has two partners, both nonresident alien individuals. 1040nr ez online You make a payment of U. 1040nr ez online S. 1040nr ez online source interest to the first partnership. 1040nr ez online It gives you a valid Form W-8IMY with which it associates a Form W-8BEN from the foreign corporation and a Form W-8IMY from the second partnership. 1040nr ez online In addition, Forms W-8BEN from the partners are associated with the Form W-8IMY from the second partnership. 1040nr ez online The Forms W-8IMY from the partnerships have complete withholding statements associated with them. 1040nr ez online Because you can reliably associate a part of the interest payment with the Form W-8BEN provided by the foreign corporation and the Forms W-8BEN provided by the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest. 1040nr ez online Example 3. 1040nr ez online You make a payment of U. 1040nr ez online S. 1040nr ez online source dividends to a withholding foreign partnership. 1040nr ez online The partnership has two partners, both foreign corporations. 1040nr ez online You can reliably associate the payment with a valid Form W-8IMY from the partnership on which it represents that it is a withholding foreign partnership. 1040nr ez online You must treat the partnership as the payee of the dividends. 1040nr ez online Foreign simple and grantor trust. 1040nr ez online   A trust is foreign unless it meets both of the following tests. 1040nr ez online A court within the United States is able to exercise primary supervision over the administration of the trust. 1040nr ez online One or more U. 1040nr ez online S. 1040nr ez online persons have the authority to control all substantial decisions of the trust. 1040nr ez online   In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. 1040nr ez online A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679 of the Code. 1040nr ez online   The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. 1040nr ez online The payees of a payment made to a foreign grantor trust are the owners of the trust. 1040nr ez online However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. 1040nr ez online If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees. 1040nr ez online Example. 1040nr ez online A foreign simple trust has three beneficiaries: two nonresident alien individuals and a U. 1040nr ez online S. 1040nr ez online citizen. 1040nr ez online You make a payment of interest to the foreign trust. 1040nr ez online It gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident aliens and a Form W-9 from the U. 1040nr ez online S. 1040nr ez online citizen. 1040nr ez online The trust also gives you a complete withholding statement that enables you to associate a part of the interest payment with the forms provided by each beneficiary. 1040nr ez online You must treat all three beneficiaries as the payees of the interest payment as if the payment were made directly to them. 1040nr ez online Report the payment to the nonresident aliens on Forms 1042-S. 1040nr ez online Report the payment to the U. 1040nr ez online S. 1040nr ez online citizen on Form 1099-INT. 1040nr ez online Fiscally transparent entity. 1040nr ez online   If a reduced rate of withholding under an income tax treaty is claimed, a flow-through entity includes any entity in which the interest holder must treat the entity as fiscally transparent. 1040nr ez online The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc. 1040nr ez online ). 1040nr ez online The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. 1040nr ez online An entity is considered to be fiscally transparent for the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. 1040nr ez online Subject to the standards of knowledge rules discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity. 1040nr ez online   The payees of a payment made to a fiscally transparent entity are the interest holders of the entity. 1040nr ez online Example. 1040nr ez online Entity A is a business organization organized under the laws of country X that has an income tax treaty in force with the United States. 1040nr ez online A has two interest holders, B and C. 1040nr ez online B is a corporation organized under the laws of country Y. 1040nr ez online C is a corporation organized under the laws of country Z. 1040nr ez online Both countries Y and Z have an income tax treaty in force with the United States. 1040nr ez online A receives royalty income from U. 1040nr ez online S. 1040nr ez online sources that is not effectively connected with the conduct of a trade or business in the United States. 1040nr ez online For U. 1040nr ez online S. 1040nr ez online income tax purposes, A is treated as a partnership. 1040nr ez online Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. 1040nr ez online The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income was realized directly from the source that paid it to A. 1040nr ez online Accordingly, A is fiscally transparent in its jurisdiction, country X. 1040nr ez online B and C are not fiscally transparent under the laws of their respective countries of incorporation. 1040nr ez online Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income was realized directly from the source that paid it to A. 1040nr ez online Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U. 1040nr ez online S. 1040nr ez online source royalty income for purposes of the U. 1040nr ez online S. 1040nr ez online -Y income tax treaty. 1040nr ez online Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. 1040nr ez online Therefore, A is not treated as fiscally transparent under the laws of country Z. 1040nr ez online Accordingly, C is not treated as deriving its share of the U. 1040nr ez online S. 1040nr ez online source royalty income for purposes of the U. 1040nr ez online S. 1040nr ez online -Z income tax treaty. 1040nr ez online Foreign Intermediaries In most cases, if you make payments to a foreign intermediary, the payees are the persons for whom the foreign intermediary collects the payment, such as account holders or customers, not the intermediary itself. 1040nr ez online This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. 1040nr ez online You may, however, treat a qualified intermediary that has assumed primary withholding responsibility for a payment as the payee, and you are not required to withhold. 1040nr ez online An intermediary is a custodian, broker, nominee, or any other person that acts as an agent for another person. 1040nr ez online A foreign intermediary is either a qualified intermediary or a nonqualified intermediary. 1040nr ez online In most cases, you determine whether an entity is a qualified intermediary or a nonqualified intermediary based on the representations the intermediary makes on Form W-8IMY. 1040nr ez online You must determine whether the customers or account holders of a foreign intermediary are U. 1040nr ez online S. 1040nr ez online or foreign persons and, if the account holder or customer is foreign, whether a reduced rate of NRA withholding applies. 1040nr ez online You make these determinations based on the foreign intermediary's Form W-8IMY and associated information and documentation. 1040nr ez online If you do not have all of the information or documentation that is required to reliably associate a payment with a payee, you must apply the presumption rules. 1040nr ez online See Documentation and Presumption Rules , later. 1040nr ez online Nonqualified intermediary. 1040nr ez online   A nonqualified intermediary (NQI) is any intermediary that is a foreign person and that is not a qualified intermediary. 1040nr ez online The payees of a payment made to an NQI are the customers or account holders on whose behalf the NQI is acting. 1040nr ez online Example. 1040nr ez online You make a payment of interest to a foreign bank that is a nonqualified intermediary. 1040nr ez online The bank gives you a Form W-8IMY and the Forms W-8BEN of two foreign persons, and a Form W-9 from a U. 1040nr ez online S. 1040nr ez online person for whom the bank is collecting the payments. 1040nr ez online The bank also associates with its Form W-8IMY a withholding statement on which it allocates the interest payment to each account holder and provides all other information required to be on the withholding statement. 1040nr ez online The account holders are the payees of the interest payment. 1040nr ez online You should report the part of the interest paid to the two foreign persons on Forms 1042-S and the part paid to the U. 1040nr ez online S. 1040nr ez online person on Form 1099-INT. 1040nr ez online Qualified intermediary. 1040nr ez online   A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U. 1040nr ez online S. 1040nr ez online intermediary) that has entered into a qualified intermediary withholding agreement (discussed later) with the IRS. 1040nr ez online You may treat a QI as a payee to the extent the QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. 1040nr ez online In this situation, the QI is required to withhold the tax. 1040nr ez online You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI. 1040nr ez online   A payment to a QI to the extent it does not assume primary NRA withholding responsibility is considered made to the person on whose behalf the QI acts. 1040nr ez online If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U. 1040nr ez online S. 1040nr ez online person. 1040nr ez online Branches of financial institutions. 1040nr ez online   Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved “know-your-customer” (KYC) rules. 1040nr ez online The countries with approved KYC rules are listed on IRS. 1040nr ez online gov. 1040nr ez online QI withholding agreement. 1040nr ez online   Foreign financial institutions and foreign branches of U. 1040nr ez online S. 1040nr ez online financial institutions can enter into an agreement with the IRS to be a qualified intermediary. 1040nr ez online   A QI is entitled to certain simplified withholding and reporting rules. 1040nr ez online In general, there are three major areas whereby intermediaries with QI status are afforded such simplified treatment. 1040nr ez online   To apply for QI status, complete Form 14345, Qualified Intermediary Application, and Form SS-4, Application for Employer Identification Number. 1040nr ez online These forms, and the procedures required to obtain a QI withholding agreement are available at www. 1040nr ez online irs. 1040nr ez online gov/Businesses/Corporations/Qualified-Intermediaries-(QI). 1040nr ez online Documentation. 1040nr ez online   A QI is not required to forward documentation obtained from foreign account holders to the U. 1040nr ez online S. 1040nr ez online withholding agent from whom the QI receives a payment of U. 1040nr ez online S. 1040nr ez online source income. 1040nr ez online The QI maintains such documentation at its location and provides the U. 1040nr ez online S. 1040nr ez online withholding agent with withholding rate pools. 1040nr ez online A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding. 1040nr ez online   A QI is required to provide the U. 1040nr ez online S. 1040nr ez online withholding agent with information regarding U. 1040nr ez online S. 1040nr ez online persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding. 1040nr ez online   If a QI obtains documentary evidence under the “know-your-customer” rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. 1040nr ez online This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence that is not of the type specified in the attachment to the agreement. 1040nr ez online Form 1042-S reporting. 1040nr ez online   A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. 1040nr ez online Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified intermediary or a flow-through entity (discussed earlier). 1040nr ez online Collective refund procedures. 1040nr ez online   A QI may seek a refund on behalf of its direct account holders. 1040nr ez online The direct account holders, therefore, are not required to file returns with the IRS to obtain refunds, but rather may obtain them from the QI. 1040nr ez online U. 1040nr ez online S. 1040nr ez online branches of foreign banks and foreign insurance companies. 1040nr ez online   Special rules apply to a U. 1040nr ez online S. 1040nr ez online branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. 1040nr ez online If you agree to treat the branch as a U. 1040nr ez online S. 1040nr ez online person, you may treat the branch as a U. 1040nr ez online S. 1040nr ez online payee for a payment subject to NRA withholding provided you receive a Form W-8IMY from the U. 1040nr ez online S. 1040nr ez online branch on which the agreement is evidenced. 1040nr ez online If you treat the branch as a U. 1040nr ez online S. 1040nr ez online payee, you are not required to withhold. 1040nr ez online Even though you agree to treat the branch as a U. 1040nr ez online S. 1040nr ez online person, you must report the payment on Form 1042-S. 1040nr ez online   A financial institution organized in a U. 1040nr ez online S. 1040nr ez online possession is treated as a U. 1040nr ez online S. 1040nr ez online branch. 1040nr ez online The special rules discussed in this section apply to a possessions financial institution. 1040nr ez online   If you are paying a U. 1040nr ez online S. 1040nr ez online branch an amount that is not subject to NRA withholding, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U. 1040nr ez online S. 1040nr ez online person for amounts subject to NRA withholding. 1040nr ez online Consequently, amounts not subject to NRA withholding that are paid to a U. 1040nr ez online S. 1040nr ez online branch are not subject to Form 1099 reporting or backup withholding. 1040nr ez online   Alternatively, a U. 1040nr ez online S. 1040nr ez online branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. 1040nr ez online In this situation, the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. 1040nr ez online See Nonqualified Intermediaries under  Documentation, later. 1040nr ez online   If the U. 1040nr ez online S. 1040nr ez online branch does not provide you with a Form W-8IMY, then you should treat a payment subject to NRA withholding as made to the foreign person of which the branch is a part and the income as effectively connected with the conduct of a trade or business in the United States. 1040nr ez online Withholding foreign partnership and foreign trust. 1040nr ez online   A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP withholding agreement with the IRS and is acting in that capacity. 1040nr ez online A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT withholding agreement with the IRS and is acting in that capacity. 1040nr ez online   A WP or WT may act in that capacity only for payments of amounts subject to NRA withholding that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. 1040nr ez online A WP or WT acting in that capacity must assume NRA withholding responsibility for these amounts. 1040nr ez online You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts. 1040nr ez online WP and WT withholding agreements. 1040nr ez online   The WP and WT withholding agreements and the application procedures for the agreements are in Revenue Procedure 2003-64. 1040nr ez online Also see the following items. 1040nr ez online Revenue Procedure 2004-21. 1040nr ez online Revenue Procedure 2005-77. 1040nr ez online Employer identification number (EIN). 1040nr ez online   A completed Form SS-4 must be submitted with the application for being a WP or WT. 1040nr ez online The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity. 1040nr ez online Documentation. 1040nr ez online   A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and a written statement identifying the amounts for which it is so acting. 1040nr ez online The statement is not required to contain withholding rate pool information or any information relating to the identity of a direct partner, beneficiary, or owner. 1040nr ez online The Form W-8IMY must contain the WP-EIN or WT-EIN. 1040nr ez online Foreign Persons A payee is subject to NRA withholding only if it is a foreign person. 1040nr ez online A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U. 1040nr ez online S. 1040nr ez online person. 1040nr ez online It also includes a foreign branch of a U. 1040nr ez online S. 1040nr ez online financial institution if the foreign branch is a qualified intermediary. 1040nr ez online In most cases, the U. 1040nr ez online S. 1040nr ez online branch of a foreign corporation or partnership is treated as a foreign person. 1040nr ez online Nonresident alien. 1040nr ez online   A nonresident alien is an individual who is not a U. 1040nr ez online S. 1040nr ez online citizen or a resident alien. 1040nr ez online A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding. 1040nr ez online Married to U. 1040nr ez online S. 1040nr ez online citizen or resident alien. 1040nr ez online   Nonresident alien individuals married to U. 1040nr ez online S. 1040nr ez online citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. 1040nr ez online However, these individuals are still subject to the NRA withholding rules that apply to nonresident aliens for all income except wages. 1040nr ez online Wages paid to these individuals are subject to graduated withholding. 1040nr ez online See Wages Paid to Employees—Graduated Withholding . 1040nr ez online Resident alien. 1040nr ez online   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. 1040nr ez online Green card test. 1040nr ez online An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. 1040nr ez online This is known as the green card test because these aliens hold immigrant visas (also known as green cards). 1040nr ez online Substantial presence test. 1040nr ez online An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. 1040nr ez online Under this test, the individual must be physically present in the United States on at least: 31 days during the current calendar year, and 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year. 1040nr ez online   In most cases, the days the alien is in the United States as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa are not counted. 1040nr ez online This exception is for a limited period of time. 1040nr ez online   For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519. 1040nr ez online Note. 1040nr ez online   If your employee is late in notifying you that his or her status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. 1040nr ez online For more information on making adjustments, see chapter 13 of Publication 15 (Circular E). 1040nr ez online Resident of a U. 1040nr ez online S. 1040nr ez online possession. 1040nr ez online   A bona fide resident of Puerto Rico, the U. 1040nr ez online S. 1040nr ez online Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U. 1040nr ez online S. 1040nr ez online citizen or a U. 1040nr ez online S. 1040nr ez online national is treated as a nonresident alien for the withholding rules explained here. 1040nr ez online A bona fide resident of a possession is someone who: Meets the presence test, Does not have a tax home outside the possession, and Does not have a closer connection to the United States or to a foreign country than to the possession. 1040nr ez online   For more information, see Publication 570, Tax Guide for Individuals With Income From U. 1040nr ez online S. 1040nr ez online Possessions. 1040nr ez online Foreign corporations. 1040nr ez online   A foreign corporation is one that does not fit the definition of a domestic corporation. 1040nr ez online A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia. 1040nr ez online Guam or Northern Mariana Islands corporations. 1040nr ez online   A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons; and At least 20% of the corporation's gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less). 1040nr ez online Note. 1040nr ez online   The provisions discussed below under U. 1040nr ez online S. 1040nr ez online Virgin Islands and American Samoa corporations will apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that possession. 1040nr ez online U. 1040nr ez online S. 1040nr ez online Virgin Islands and American Samoa corporations. 1040nr ez online   A corporation created or organized in, or under the laws of, the U. 1040nr ez online S. 1040nr ez online Virgin Islands or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons, At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U. 1040nr ez online S. 1040nr ez online Virgin Islands, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less), and No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the U. 1040nr ez online S. 1040nr ez online Virgin Islands, American Samoa, Guam, the CNMI, or the United States. 1040nr ez online Foreign private foundations. 1040nr ez online   A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. 1040nr ez online Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to NRA withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate. 1040nr ez online Other foreign organizations, associations, and charitable institutions. 1040nr ez online   An organization may be exempt from income tax under section 501(a) of the Internal Revenue Code even if it was formed under foreign law. 1040nr ez online In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations. 1040nr ez online   Payments to these organizations, however, must be reported on Form 1042-S, even though no tax is withheld. 1040nr ez online   You must withhold tax on the unrelated business income (as described in Publication 598, Tax on Unrelated Business Income of Exempt Organizations) of foreign tax-exempt organizations in the same way that you would withhold tax on similar income of nonexempt organizations. 1040nr ez online U. 1040nr ez online S. 1040nr ez online branches of foreign persons. 1040nr ez online   In most cases, a payment to a U. 1040nr ez online S. 1040nr ez online branch of a foreign person is a payment made to the foreign person. 1040nr ez online However, you may treat payments to U. 1040nr ez online S. 1040nr ez online branches of foreign banks and foreign insurance companies (discussed earlier) that are subject to U. 1040nr ez online S. 1040nr ez online regulatory supervision as payments made to a U. 1040nr ez online S. 1040nr ez online person, if you and the U. 1040nr ez online S. 1040nr ez online branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. 1040nr ez online For this purpose, a financial institution organized under the laws of a U. 1040nr ez online S. 1040nr ez online possession is treated as a U. 1040nr ez online S. 1040nr ez online branch. 1040nr ez online Documentation In most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following. 1040nr ez online The payee is a U. 1040nr ez online S. 1040nr ez online person. 1040nr ez online The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. 1040nr ez online In most cases, you must get the documentation before you make the payment. 1040nr ez online The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. 1040nr ez online See Standards of Knowledge , later. 1040nr ez online If you cannot reliably associate a payment with valid documentation, you must use the presumption rules discussed later. 1040nr ez online For example, if you do not have documentation or you cannot determine the part of a payment that is allocable to specific documentation, you must use the presumption rules. 1040nr ez online The specific types of documentation are discussed in this section. 1040nr ez online However, see Withholding on Specific Income , later, as well as the instructions to the particular forms. 1040nr ez online As the withholding agent, you also may want to see the Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY. 1040nr ez online Section 1446 withholding. 1040nr ez online   Under section 1446 of the Code, a partnership must withhold tax on its effectively connected income allocable to a foreign partner. 1040nr ez online In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. 1040nr ez online This is the same documentation that is filed for NRA withholding, but may require additional information as discussed under each of the forms in this section. 1040nr ez online Joint owners. 1040nr ez online    If you make a payment to joint owners, you need to get documentation from each owner. 1040nr ez online Form W-9. 1040nr ez online   In most cases, you can treat the payee as a U. 1040nr ez online S. 1040nr ez online person if the payee gives you a Form W-9. 1040nr ez online The Form W-9 can be used only by a U. 1040nr ez online S. 1040nr ez online person and must contain the payee's taxpayer identification number (TIN). 1040nr ez online If there is more than one owner, you may treat the total amount as paid to a U. 1040nr ez online S. 1040nr ez online person if any one of the owners gives you a Form W-9. 1040nr ez online See U. 1040nr ez online S. 1040nr ez online Taxpayer Identification Numbers , later. 1040nr ez online U. 1040nr ez online S. 1040nr ez online persons are not subject to NRA withholding, but may be subject to Form 1099 reporting and backup withholding. 1040nr ez online Form W-8. 1040nr ez online   In most cases, a foreign payee of the income should give you a form in the Form W-8 series. 1040nr ez online Until further notice, you can rely upon Forms W-8 that contain a P. 1040nr ez online O. 1040nr ez online box as a permanent residence address provided you do not know, or have reason to know, that the person providing the form is a U. 1040nr ez online S. 1040nr ez online person and that a street address is available. 1040nr ez online You may rely on Forms W-8 for which there is a U. 1040nr ez online S. 1040nr ez online mailing address provided you received the form prior to December 31, 2001. 1040nr ez online   If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. 1040nr ez online You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U. 1040nr ez online S. 1040nr ez online possession. 1040nr ez online Other documentation. 1040nr ez online   Other documentation may be required to claim an exemption from, or a reduced rate of, withholding on pay for personal services. 1040nr ez online The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. 1040nr ez online These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income. 1040nr ez online Beneficial Owners If all the appropriate requirements have been established on a Form W-8BEN, W-8ECI, W-8EXP or, if applicable, on documentary evidence, you may treat the payee as a foreign beneficial owner. 1040nr ez online Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. 1040nr ez online   This form is used by a foreign person to: Establish foreign status; Claim that such person is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding; and If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty. 1040nr ez online   Form W-8BEN also may be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding. 1040nr ez online For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding. 1040nr ez online Claiming treaty benefits. 1040nr ez online   You may apply a reduced rate of withholding to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the person provides a U. 1040nr ez online S. 1040nr ez online TIN and certifies that: It is a resident of a treaty country; It is the beneficial owner of the income; If it is an entity, it derives the income within the meaning of section 894 of the Internal Revenue Code (it is not fiscally transparent); and It meets any limitation on benefits provision contained in the treaty, if applicable. 1040nr ez online   If the foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner also must certify on Form W-8BEN that it will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to NRA withholding received during a calendar year exceeds, in the aggregate, $500,000. 1040nr ez online   An entity derives income for which it is claiming treaty benefits only if the entity is not treated as fiscally transparent for that income. 1040nr ez online See Fiscally transparent entity discussed earlier under Flow-Through Entities. 1040nr ez online   Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. 1040nr ez online For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States or the treaty country. 1040nr ez online   The exemptions from, or reduced rates of, U. 1040nr ez online S. 1040nr ez online tax vary under each treaty. 1040nr ez online You must check the provisions of the tax treaty that apply. 1040nr ez online Tables at the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding that apply in cases where all conditions of the particular treaty articles are satisfied. 1040nr ez online   If you know, or have reason to know, that an owner of income is not eligible for treaty benefits claimed, you must not apply the treaty rate. 1040nr ez online You are not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which you did not have actual knowledge, or reason to know, that the statements were incorrect. 1040nr ez online Exceptions to TIN requirement. 1040nr ez online   A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements for the following exceptions are met. 1040nr ez online Income from marketable securities (discussed next). 1040nr ez online Unexpected payments to an individual (discussed under U. 1040nr ez online S. 1040nr ez online Taxpayer Identification Numbers ). 1040nr ez online Marketable securities. 1040nr ez online   A Form W-8BEN provided to claim treaty benefits does not need a U. 1040nr ez online S. 1040nr ez online TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. 1040nr ez online For this purpose, income from a marketable security consists of the following items. 1040nr ez online Dividends and interest from stocks and debt obligations that are actively traded. 1040nr ez online Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund). 1040nr ez online Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933. 1040nr ez online Income related to loans of any of the above securities. 1040nr ez online Offshore accounts. 1040nr ez online   If a payment is made outside the United States to an offshore account, a payee may give you documentary evidence, rather than Form W-8BEN. 1040nr ez online   In most cases, a payment is made outside the United States if you complete the acts necessary to effect the payment outside the United States. 1040nr ez online However, an amount paid by a bank or other financial institution on a deposit or account usually will be treated as paid at the branch or office where the amount is credited. 1040nr ez online An offshore account is an account maintained at an office or branch of a U. 1040nr ez online S. 1040nr ez online or foreign bank or other financial institution at any location outside the United States. 1040nr ez online   You may rely on documentary evidence given to you by a nonqualified intermediary or a flow-through entity with its Form W-8IMY. 1040nr ez online This rule applies even though you make the payment to a nonqualified intermediary or flow-through entity in the United States. 1040nr ez online In most cases, the nonqualified intermediary or flow-through entity that gives you documentary evidence also will have to give you a withholding statement, discussed later. 1040nr ez online Documentary evidence. 1040nr ez online   You may apply a reduced rate of withholding to income from marketable securities (discussed earlier) paid outside the United States to an offshore account if the beneficial owner gives you documentary evidence in place of a Form W-8BEN. 1040nr ez online To claim treaty benefits, the documentary evidence must be one of the following: A certificate of residence that: Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident, States that the person has filed its most recent income tax return as a resident of that country, and Is issued within 3 years prior to being presented to you. 1040nr ez online Documentation for an individual that: Includes the individual's name, address, and photograph, Is an official document issued by an authorized governmental body, and Is issued no more than 3 years prior to being presented to you. 1040nr ez online Documentation for an entity that: Includes the name of the entity, Includes the address of its principal office in the treaty country, and Is an official document issued by an authorized governmental body. 1040nr ez online In addition to the documentary evidence, a foreign beneficial owner that is an entity must provide a statement that it derives the income for which it claims treaty benefits and that it meets one or more of the conditions set forth in a limitation on benefits article, if any, (or similar provision) contained in the applicable treaty. 1040nr ez online Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. 1040nr ez online   This form is used by a foreign person to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim that the income is effectively connected with the conduct of a trade or business in the United States. 1040nr ez online (See Effectively Connected Income , later. 1040nr ez online )   Effectively connected income for which a valid Form W-8ECI has been provided is generally not subject to NRA withholding. 1040nr ez online   If a partner submits this form to a partnership, the income claimed to be effectively connected with the conduct of a U. 1040nr ez online S. 1040nr ez online trade or business is subject to withholding under section 1446. 1040nr ez online If the partner has made, or will make, an election under section 871(d) or 882(d), the partner must submit Form W-8ECI, and attach a copy of the election, or a statement of intent to elect, to the form. 1040nr ez online    If the partner's only effectively connected income is the income allocated from the partnership and the partner is not making the election under section 871(d) or 882(d), the partner should provide Form W-8BEN to the partnership. 1040nr ez online Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. 1040nr ez online   This form is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U. 1040nr ez online S. 1040nr ez online possession to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim a reduced rate of, or an exemption from, withholding as such an entity. 1040nr ez online   If the government or organization is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the partner is subject to withholding under section 1446. 1040nr ez online   See Foreign Governments and Certain Other Foreign Organizations , later. 1040nr ez online Foreign Intermediaries and Foreign Flow-Through Entities Payments made to a foreign intermediary or foreign flow-through entity are treated as made to the payees on whose behalf the intermediary or entity acts. 1040nr ez online The Form W-8IMY provided by a foreign intermediary or flow-through entity must be accompanied by additional information for you to be able to reliably associate the payment with a payee. 1040nr ez online The additional information required depends on the type of intermediary or flow-through entity and the extent of the withholding responsibilities it assumes. 1040nr ez online Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U. 1040nr ez online S. 1040nr ez online Branches for United States Tax Withholding. 1040nr ez online   This form is used by foreign intermediaries and foreign flow-through entities, as well as certain U. 1040nr ez online S. 1040nr ez online branches, to: Represent that a foreign person is a qualified intermediary or nonqualified intermediary, Represent, if applicable, that the qualified intermediary is assuming primary NRA withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility, Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust, Represent that a foreign flow-through entity is a nonwithholding foreign partnership, or a nonwithholding foreign trust and that the income is not effectively connected with the conduct of a trade or business in the United States, Represent that the provider is a U. 1040nr ez online S. 1040nr ez online branch of a foreign bank or insurance company and either is agreeing to be treated as a U. 1040nr ez online S. 1040nr ez online person or is transmitting documentation of the persons on whose behalf it is acting, or Represent that, for purposes of section 1446, it is an upper-tier foreign partnership or a foreign grantor trust and that the form is being used to transmit the required documentation. 1040nr ez online For information on qualifying as an upper-tier foreign partnership, see Regulations section 1. 1040nr ez online 1446-5. 1040nr ez online Qualified Intermediaries In most cases, a QI is any foreign intermediary that has entered into a QI withholding agreement (discussed earlier) with the IRS. 1040nr ez online A foreign intermediary that has received a QI employer identification number (QI-EIN) may represent on Form W-8IMY that it is a QI before it receives a fully executed agreement. 1040nr ez online The intermediary can claim that it is a QI until the IRS revokes its QI-EIN. 1040nr ez online The IRS will revoke a QI-EIN if the QI agreement is not executed and returned to the IRS within a reasonable period of time after the agreement was sent to the intermediary for signature. 1040nr ez online Responsibilities. 1040nr ez online   Payments made to a QI that does not assume NRA withholding responsibility are treated as paid to its account holders and customers. 1040nr ez online However, a QI is not required to provide you with documentation it obtains from its foreign account holders and customers. 1040nr ez online Instead, it provides you with a withholding statement that contains withholding rate pool information. 1040nr ez online A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding. 1040nr ez online A qualified intermediary is required to provide you with information regarding U. 1040nr ez online S. 1040nr ez online persons subject to Form 1099 reporting and to provide you withholding rate pool information separately for each such U. 1040nr ez online S. 1040nr ez online person unless it has assumed Form 1099 reporting and backup withholding responsibility. 1040nr ez online For the alternative procedure for providing rate pool information for U. 1040nr ez online S. 1040nr ez online non-exempt persons, see the Form W-8IMY instructions. 1040nr ez online   The withholding statement must: Designate those accounts for which it acts as a qualified intermediary, Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding responsibility, and Provide sufficient information for you to allocate the payment to a withholding rate pool. 1040nr ez online   The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI. 1040nr ez online Primary responsibility not assumed. 1040nr ez online   If a QI does not assume primary NRA withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for the payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to each withholding rate pool for foreign payees. 1040nr ez online Unless the alternative procedure applies, the qualified intermediary must provide you with a separate withholding rate pool for each U. 1040nr ez online S. 1040nr ez online person subject to Form 1099 reporting and/or backup withholding. 1040nr ez online The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. 1040nr ez online Primary NRA withholding responsibility assumed. 1040nr ez online   If you make a payment to a QI that assumes primary NRA withholding responsibility (but not primary Form 1099 reporting and backup withholding responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the part of the payment attributable to withholding rate pools for each U. 1040nr ez online S. 1040nr ez online person, unless the alternative procedure applies, subject to Form 1099 reporting and/or backup withholding. 1040nr ez online The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. 1040nr ez online Primary NRA and Form 1099 responsibility assumed. 1040nr ez online   If you make a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting and backup withholding responsibility, you can reliably associate a payment with valid documentation provided that you receive a valid Form W-8IMY. 1040nr ez online It is not necessary to associate the payment with withholding rate pools. 1040nr ez online Example. 1040nr ez online You make a payment of dividends to a QI. 1040nr ez online It has five customers: two are foreign persons who have provided documentation entitling them to a 15% rate of withholding on dividends; two are foreign persons subject to a 30% rate of withholding on dividends; and one is a U. 1040nr ez online S. 1040nr ez online individual who provides it with a Form W-9. 1040nr ez online Each customer is entitled to 20% of the dividend payment. 1040nr ez online The QI does not assume any primary withholding responsibility. 1040nr ez online The QI gives you a Form W-8IMY with which it associates the Form W-9 and a withholding statement that allocates 40% of the dividend to a 15% withholding rate pool, 40% to a 30% withholding rate pool, and 20% to the U. 1040nr ez online S. 1040nr ez online individual. 1040nr ez online You should report on Forms 1042-S 40% of the payment as made to a 15% rate dividend pool and 40% of the payment as made to a 30% rate dividend pool. 1040nr ez online The part of the payment allocable to the U. 1040nr ez online S. 1040nr ez online individual (20%) is reportable on Form 1099-DIV. 1040nr ez online Smaller partnerships and trusts. 1040nr ez online   A QI may apply special rules to a smaller partnership or trust (Joint Account Provision) only if the partnership or trust meets the following conditions. 1040nr ez online It is a foreign partnership or foreign simple or grantor trust. 1040nr ez online It is a direct account holder of the QI. 1040nr ez online It does not have any partner, beneficiary, or owner that is a U. 1040nr ez online S. 1040nr ez online person or a pass- through partner, beneficiary, or owner. 1040nr ez online   For information on these rules, see section 4A. 1040nr ez online 01 of the QI agreement. 1040nr ez online This is found in Appendix 3 of Revenue Procedure 2003-64. 1040nr ez online Also see Revenue Procedure 2004-21. 1040nr ez online Related partnerships and trusts. 1040nr ez online    A QI may apply special rules to a related partnership or trust only if the partnership or trust meets the following conditions. 1040nr ez online It is a foreign partnership or foreign simple or grantor trust. 1040nr ez online It is either: A direct account holder of the QI, or An indirect account holder of the QI that is a direct partner, beneficiary, or owner of a partnership or trust to which the QI has applied this rule. 1040nr ez online For information on these rules, see section 4A. 1040nr ez online 02 of the QI agreement. 1040nr ez online This is found in Appendix 3 of Revenue Procedure 2003-64. 1040nr ez online Also see Revenue Procedure 2005-77. 1040nr ez online Nonqualified Intermediaries If you are making a payment to an NQI, foreign flow-through entity, or U. 1040nr ez online S. 1040nr ez online branch that is using Form W-8IMY to transmit information about the branch's account holders or customers, you can treat the payment (or a part of the payment) as reliably associated with valid documentation from a specific payee only if, prior to making the payment: You can allocate the payment to a valid Form W-8IMY, You can reliably determine how much of the payment relates to valid documentation provided by a payee (a person that is not itself a foreign intermediary, flow- through entity, or U. 1040nr ez online S. 1040nr ez online branch), and You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required. 1040nr ez online The NQI, flow-through entity, or U. 1040nr ez online S. 1040nr ez online branch must give you certain information on a withholding statement that is associated with the Form W-8IMY. 1040nr ez online A withholding statement must be updated to keep the information accurate prior to each payment. 1040nr ez online Withholding statement. 1040nr ez online   In most cases, a withholding statement must contain the following information. 1040nr ez online The name, address, and TIN (if any, or if required) of each person for whom documentation is provided. 1040nr ez online The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided. 1040nr ez online The status of the person for whom the documentation has been provided, such as whether the person is a U. 1040nr ez online S. 1040nr ez online exempt recipient (U. 1040nr ez online S. 1040nr ez online person exempt from Form 1099 reporting), U. 1040nr ez online S. 1040nr ez online non-exempt recipient (U. 1040nr ez online S. 1040nr ez online person subject to Form 1099 reporting), or a foreign person. 1040nr ez online For a foreign person, the statement must indicate whether the person is a beneficial owner or a foreign intermediary, flow-through entity, or a U. 1040nr ez online S. 1040nr ez online branch. 1040nr ez online The type of recipient the person is, based on the recipient codes used on Form 1042-S. 1040nr ez online Information allocating each payment, by income type, to each payee (including U. 1040nr ez online S. 1040nr ez online exempt and U. 1040nr ez online S. 1040nr ez online non-exempt recipients) for whom documentation has been provided. 1040nr ez online The rate of withholding that applies to each foreign person to whom a payment is allocated. 1040nr ez online A foreign payee's country of residence. 1040nr ez online If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc. 1040nr ez online ). 1040nr ez online In the case of treaty benefits claimed by entities, whether the applicable limitation on benefits statement and the statement that the foreign person derives the income for which treaty benefits are claimed, have been made. 1040nr ez online The name, address, and TIN (if any) of any other NQI, flow-through entity, or U. 1040nr ez online S. 1040nr ez online branch from which the payee will directly receive a payment. 1040nr ez online Any other information a withholding agent requests to fulfill its reporting and withholding obligations. 1040nr ez online Alternative procedure. 1040nr ez online   Under this alternative procedure the NQI can give you the information that allocates each payment to each foreign and U. 1040nr ez online S. 1040nr ez online exempt recipient by January 31 following the calendar year of payment, rather than prior to the payment being made as otherwise required. 1040nr ez online To take advantage of this procedure, the NQI must: (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. 1040nr ez online You must receive the withholding statement with all the required information (other than item 5) prior to making the payment. 1040nr ez online    This alternative procedure cannot be used for payments to U. 1040nr ez online S. 1040nr ez online non-exempt recipients. 1040nr ez online Therefore, an NQI must always provide you with allocation information for all U. 1040nr ez online S. 1040nr ez online non-exempt recipients prior to a payment being made. 1040nr ez online Pooled withholding information. 1040nr ez online   If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, prior to the payment of a reportable amount. 1040nr ez online A withholding rate pool is a payment of a single type of income (as determined by the income categories on Form 1042-S) that is subject to a single rate of withholding. 1040nr ez online For example, an NQI that has foreign account holders receiving royalties and dividends, both subject to the 15% rate, will provide you with information for two withholding rate pools (one for royalties and one for dividends). 1040nr ez online The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment. 1040nr ez online Failure to provide allocation information. 1040nr ez online   If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. 1040nr ez online You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules . 1040nr ez online An NQI is deemed to have f