| Does your partnership have U.S. income and foreign | | | | the un-extended due date of the partnership return |
| partners? If so, you may be personally liable for making | | | | (April 15 for calendar year). Payments of 30% (or |
| payments of U.S. taxes for the foreign partners. | | | | treaty rate) for distributed passive income are due |
| Partnerships conducting a trade or business in the U.S. | | | | under normal withholding tax rules (often next business |
| are required to make payments of Federal income tax | | | | day). Where passive income remains undistributed, it is |
| ("1446 Payments") on behalf of foreign partners. | | | | deemed distributed at year end, but tax payment is |
| These payments are due quarterly and are computed | | | | due on the un-extended due date of the partnership |
| in a manner similar to corporate estimated tax | | | | return. |
| payments. The payments are computed at the highest | | | | A partner with prior U.S. tax losses on their returns can |
| rate of tax (now 35%) for the type of partner. Special | | | | have the partnership reduce its 1446 Payment. To get |
| rules apply to reduce the amount of the payment for a | | | | this reduction, the partner must provide the partnership |
| particular partner for loss carry forwards and certain | | | | a statement indicating how much loss carryover the |
| other items of that partner. Payments made on behalf | | | | partner has available. The partnership will then reduce |
| of a partner are a refundable withholding tax credit for | | | | the partner's ECI subject to the payment by the |
| the partner upon filing a U.S. income tax return. If the | | | | amount of this loss until it is used up. Without the |
| partner owes no tax, there is a full refund to the | | | | partner's sworn statement, the partnership must pay |
| partner. | | | | the full 35% tax. |
| 1446 Payments are required be every partnership that | | | | Failing to make these payments can result in penalties. |
| has income from a U.S. trade or business, called | | | | Payments must be deposited with a bank or made by |
| effectively connected income or ECI, and has foreign | | | | electronic funds transfer to the IRS. If the payments |
| partner(s). This applies to partnerships formed under | | | | paid are late, the IRS automatically imposes a penalty |
| U.S. law or under foreign law. The questions of | | | | of similar to interest on the amount that is late, and |
| whether a trade or business exists and whether the | | | | may impose a late deposit penalty of up to 10%. In |
| income is effectively connected with such trade or | | | | addition, the IRS may impose a $100 penalty on the |
| business are inherently factual. There are no bright line | | | | partnership. If the payments are not paid, the IRS may |
| tests, though there are exceptions. Generally, if a | | | | impose a penalty of 100% on the partnership, in |
| revenue producing business is conducted in the U.S., | | | | addition to collecting the tax from the partnership. |
| then the income from the U.S. part of that business is | | | | EACH AND EVERY general partner of the |
| ECI. However, if the activities in the U.S. are solely | | | | partnership is liable for the payments and penalties. |
| administrative, or if U.S. activities are only occasional, | | | | Also, the person in charge of partnership funds (such |
| then the income may not be ECI. In addition, there are | | | | as the controller or manager) could be subject to the |
| certain exceptions in IRS regulations, mostly related to | | | | 100% penalty. |
| securities and commodity traders. | | | | The partnership must file IRS Forms 8813 at the |
| In addition, partnerships must withhold 30% Federal | | | | quarterly due dates above to report aggregate 1446 |
| income tax ("1441 Payments") on distributions to | | | | Payments. It must file Forms 8804 and 8805 with its |
| partners of their share of non-ECI interest, dividends, | | | | partnership return (Form 1065) after year end. The |
| rents and royalties. The rate of tax may be reduced | | | | partnership also provides a copy of Form 8805 to the |
| under a U.S. income tax treaty with the partner's home | | | | foreign partner as proof of payment of U.S. income |
| country. But to get this reduction, the partner must | | | | tax. The partnership must also follow deposit rules and |
| have provided the partnership with Form W-8BEN | | | | reporting, and file Forms 1042 and 1042-S at year end |
| before the payment. | | | | with respect to 1441 Payments. |
| The 1441 and 1446 payments apply only to foreign | | | | Year end 1441 Payments and all 1446 Payments are |
| partners. An individual is foreign if he or she is not a | | | | considered distributions to partners under Federal tax |
| U.S. citizen AND not a U.S. resident. A corporation is | | | | law. However, unless the partnership agreement |
| foreign if it is incorporated outside the U.S. Where | | | | explicitly refers to these payments, the treatment |
| payments are to partnerships, the originating | | | | under partnership law may be unresolved. Partnership |
| partnership must look through the receiving partnership | | | | agreements need to explicitly provide that these |
| to determine residence of corporate or individual | | | | payments are considered distributions to the affected |
| partners. The payment requirement applies at EACH | | | | partners. |
| tier of partnerships. | | | | In addition to Federal requirements, many states require |
| Payments are due only on each foreign partner's | | | | that partnerships make estimated and final tax |
| share of the income. This share is determined under | | | | payments for partners not resident in the state. Rules |
| the partnership agreement. Payments of 35% of | | | | vary widely by state. |
| foreign partners' share of ECI are due quarterly on the | | | | Is your partnership making the required payments on |
| corporate estimated payment dates. These are April | | | | time? If not, you may be personally exposed to |
| 15, June 15, September 15, and December 15 for | | | | penalties. Getting the competent help you need can |
| calendar year partnerships. A final payment is due on | | | | cost much less than IRS penalties. |