Choosing the appropriate ownership vehicle is an essential step for foreign investors building their portfolio with investments in the United States. A good fit offers advantages in several financial areas, not least of which are tax-related. Even so, investing as a corporation rather than an individual carries certain risks; working with an accountant experienced in foreign investment tax returns in Bellingham, MA is the best way to enjoy these benefits while avoiding costly missteps. Ann Irons, a certified public account who prepares tax returns, explains.

Similarities for Individual and Corporate Withholding

Despite the obvious differences between corporations and individuals, the United States’ approach to taxing both types of investor is similar. For example, the following guidelines apply to both:

• A 30 percent withholding rate applies unless considered effectively connected
• Certain exemptions are available for capital gains (except from sale of real property)
• Portfolio interest and interest on bank deposits may be exempt from withholding
• Taxes may be waived or reduced in the presence of a tax treaty

Considerations for Effectively Connected Income

Separate rules apply for income that is effectively connected with trade or business in the United States; a good example would be income generated by a partnership involved in a U.S. business. Corporations must pay the corporate tax rate, which is set at a maximum of 35 percent. However, cautions Irons, an additional branch profits tax may apply. Effectively connected income generated by individual investors is also subject to an individual tax rate not to exceed 35 percent. As with other forms of income, effectively connected income, whether earned for an individual or corporation, may be subject to a reduction or waiver under terms of a tax treaty. Note that some expenses are deductible if they relate directly to income-producing activities; your Massachusetts tax preparer will help you determine which expenses are eligible.

Tax Benefits Alone Aren't Enough

Because both individual and corporate foreign investors are typically subject to a comparable 35 percent tax rate, tax benefits alone aren’t usually sufficient to warrant taking the corporate route rather than filing as an individual. If you choose to move forward with incorporating, understand that the Internal Revenue Service has extremely strict guidelines on what constitutes a legitimate corporate entity. If these requirements are not met, the entity is considered a “sham corporation.” A sham corporation will not enjoy the same advantages, tax-related or otherwise, as a compliant corporation; the U.S. may levy a hefty estate tax on some or all assets to which the corporation claims ownership.

Need more information on international tax returns in Massachusetts? To learn more about filing requirements, or to schedule a meeting with Ann Irons, CPA, LLC, contact us at (508) 966-0700. We provide accounting and tax services for individuals, businesses, and law firms.