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Pass Through U.S. Taxation For Non-Residents and LLCs Explained

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Pass Through U.S. Taxation For Non-Residents and LLCs Explained

Non-Residents and LLCs Explained – An increasingly large number of non-residents are choosing to establish their businesses in the U.S. in favor of their own local jurisdictions.

This is happening for a number of reasons, most notably because of the US’s strong economy and large amounts of angel investment.

That being said, it can lead to some confusion regarding domestic taxation, particularly with Trump’s 2017 changes to the ways in which pass-through entities were taxed.

LLCs are one of the most popular business entity choices for small and medium-sized enterprises (SMEs) looking to incorporate themselves as a formal structure because of their pass-through entity status and personal asset protection, but what does this mean?

This article will provide some elucidation to these questions, as well as why LLCs and the U.S. are so popular for business formation among non-residents.

What are LLCs?

LLCs are one of the simplest business structures that can be formed in the US, yet offer an array of valuable benefits, particularly to smaller and newer businesses.

Inherent to this business structure is its personal liability protection and pass-through taxation, both of which will be explored in more detail below.

Due to their simplicity, LLCs are extremely popular with non-residents because they are not too difficult or expensive to set up.

That being said, the other benefits associated with this structure are extremely appealing to non-residents; it is the perfect blend of simplicity and features.

LLC Benefits

Limited Liability Protection

The paramount benefit of LLCs for many is their inherent personal liability protection.

This refers to the protection that is afforded to an LLC member’s personal assets with regard to the business’s debts and liabilities.

Namely, personal assets are completely off-limits to creditors and lawsuits or any sort of business debt that needs to be recovered.

Put briefly, as long as the company has not acted in a criminal or fraudulent manner, the personal assets of an LLC’s members cannot be used to recover business debts.

Pass-Through Entity

Another popular reason business owners choose to structure their businesses as LLCs is because they can benefit from its pass-through entity status.

which can save them significant amounts of money on the amount of tax they are liable to pay on business profits.

In an LLC, the business’s profits ‘pass through’ the company unscathed by corporation tax, and are then first reported for tax purposes on the individual tax returns of the members who pay themselves with the business’s profits.

This means that the profits are only taxed once, in direct contrast to corporations, which are subject to ‘double taxation’ since owners must pay corporation tax on the profits, then personal income tax on their from it.

Pass-Through Taxation

President Trump’s Tax Cuts and Jobs Act (TCJA) made significant reforms to pass-through entities in 2017 by including an additional tax deduction for what is referred to as Qualified Business Income (QB!).

Under this new provision (included under Section 199A), up to 20% of this ‘qualified business income’ is able to be subtracted from the pass-through income of some businesses.

Tax is then only paid on the remainder.

In particular, QBI is stated to apply to ‘non-corporate taxpayers’, which can be understood to include individuals, sole proprietorships, partnerships, and S corporations.

These parties were also granted the right to deduct an additional 20% of qualified income from real estate investment trust (REIT) dividends and publicly traded partnerships (PTP).

That being said, there are a number of limitations applied to this deduction. Namely, specific service businesses referred to as “Specified Service Trades and Businesses” (SSTBs) cannot claim QBI.

Businesses in these industries, which include law, consultancy, and accounting firms, are ineligible for QBI if they earn over a stipulated amount.

These amounts change over time, but in 2020, if an SSTB’s taxable income exceeded $163,300 (and $326,000 for married couples filing as joint taxpayers), the deduction gradually begins to gradually decline the further over this threshold a business earns.

The maximum income an SSTB can earn before the deduction cannot be claimed is $213,000 for individuals and double that for married couples.

The USA Appeal

Many non-residents from around the globe view the US economy as their golden ticket to success, and the easiest way to take advantage of this economy is to establish a US company.

The US is so popular because it is easier to sell on this market, particularly with regard to tax and customs.

On top of this, angel investment and venture capital markets in the US are huge, particularly in comparison to those of other big economies around the world.

For example, angel investment in the US is nearly double that which takes place in Europe.

Our Thoughts

On balance, the reasons why non-residents select to form their companies as LLCs in the US are quite clear as there are numerous benefits associated with each of these choices.

For more information on US companies for non-residents, please see this link for a great resource on the topic.

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