S Corp and Resident Alien Requirement

[Green_guru]

Hi
I heard that S Corp has a requirement that u have to be a resident alien or citizen.

What defines resident Alien . I am in I485 stage waiting for FP, Currently working on EAD.

[CelticFlyer]

Originally posted by ****


Resident Alien is the same as Permanent Resident. It was one of the former names of PR status, and the term is still widely used in laws and other government documents.
So you have to have I-485 approval (or entered the US with an Immigrant Visa when going through CP).

I don't agree. The IRS defines a Resident Alient in terms which are defined in their publication 519 aimed at Aliens. There are several tests one of which is the "Substantive Presence" test.

What I have not been sure about is whether the definition applied for the purposes of completing your tax return (as in publication 519) is the same as would apply to S Corp share ownership.

[enterpriner]

Looks like Limited Liability Company (LLC) is better option than S Crop for small business & companies.

This does not have the limitaion of only GC's etc. You can have any one in the world as your partner or owner it self.

It also has an advantage of pass-throw taxes. That means your LLC doen not have to pay taxes for its profit. It will be passed to each partner (or sole owner) he/she should file extra form for this.

I got these info from www.llc.com.
Looks like these guy's take care of regestering and doing paper works. Does any one has any experience with them ?

-Ven

[gcwaiting007]

Yes, you get pass-thru taxation benefit, but that is if you opt for the default option of a single member LLC to be the sole-proprietor where you are not treated separately from your business entity, right?

But you have to pay employment tax. Can someone throw some light whether this will be more beneficial than paying corporate tax? Any personal experiences please? I guess it depends on how much you make. So, LLCs could be better from a tax point of view until your employment taxes are less than the Corporate taxes? Is it right?

Also, can anyone recommend a good tax consultant in the Oakland, CA area?

Thanx

[enterpriner]

Here are the reasons why I feel LLC is better for small businesses.

1). You can make single owner or as many as we like (there is a max limit
2). If you make loses in first few years, you can detect from your personal income.
3). Its liyability is assert of the company, they can not come behind you personal property.
4). Only disadvantage is we can not go to public as long as we are LLC. But we can change any time.

Corporations have to pay, corporate tax on profits and if you leave the money in corporation that is it. If you take off the profit as devidends we have to pay taxes on devidends as normal income. This is more usefull, if you want to build business large and do not want to take money out of business.
So if you see for most of our cases ( small business ), we like to take the frout out as soon as passible. when we think we want to build corporation we can change the state of LLC to C.


This is my book knowledge not own experience...


- Ent.

[ravi_comp]

Here is a response from the IRS help line! If you have any doubts you can put up the question to IRS yourself by going to the following link.
http://www.irs.gov/help/page/0,,id=13162,00.html
Thanks
Ravi

From: TaxHelp@hal1.ausc.irs.gov
To:
Subject: IRS Email Tax Law Assistance







NOTE: Our response to your tax law question appears below. If you have a
follow-up question or another general tax law question, please return to our
web site at: (http://www.irs.gov/help/page/0,,id=13162,00.html) to submit
it. Please do not use your "reply" button to respond to this message. More
helpful information is provided at the end of this message.


Your Question Was:
Hi I am currently residing in the US on a special work permit (H1B) on a
temporary basis. I meet the substantial presence test and hence i persume i
would be a resident alien as per IRS defenition due to the fact that i meet
the substantial persence test. Since i am a resident alien i could be the
Shareholder of an S Corportation despite the fact that i am not a permanent
resident provided i meet all INS requirements. Is this correct? I would
appreciate your response. Thanks RP


The Answer To Your Question Is:
Thank you for your inquiry.

As long as you are a resident of the United States and you do not qualify as
a nonresident alien for US tax purposes, you can be a shareholder in an S
Corporation. However, once you leave the United States and no longer
qualify as a resident alien, you will no longer qualify to be a shareholder
of an S Corporation.

IRS forms and publications may be accessed on our web site at the following
address: http://www.irs.gov/formspubs/index.html or ordered through our
toll-free forms lines at:
800-829-1040 IRS Tax Help Line for Individuals
(NEW) 800-829-4933 Business and Specialty Tax Help Line
(NEW) 800-829-1954 Refund Hotline

which are available 24 hours a day, 7 days a week, with 7-10 days delivery
time.

We are interested in your opinion and providing the best possible service to
you. Please take a moment to answer our survey at:
http://www.irs.gov/help/page/0,,id=13155,00.html
This answer is based on our understanding of the facts you presented in your
question. Omission of facts may affect the answer given.

Here's a tip for navigating the IRS web site. Use the "search" button at the
bottom of the home page. Enter key words or phrases for your topic in the
entry box. It could help you find your answer immediately.


EMPLOYEE ID: 28-29139 Ms. McKay Tel.:English--(215) 516-2000
Spanish--(800)-829-1040 msg#: 1286723

[ravi_comp]

We are residents for tax purposes and that is what counts to be eligeble to be a shareholder of an S Corp.

I put the same question so as to make it more clear to IRS. In my question i clearly mentioned that we are called Non resident aliens by INS and blah blah.. and the response is below.

****, I have been reading many of your posts on this forum for quite some time and have a lot of respect for your posts/openion on immigration issues but however in this situation you are incorrect. May be you can put the question to IRS yourself and see what they say.

Apart from this i put this question on www.fairmark.com which is run by a very well know tax consultant Kaye Thomas who is also an author of number of books. I was fortunate to get an answer from Mr. Kayle himself. Here is the link.

http://www.board.fairmark.com/board1/messages/21056.htm

I am sure this should convince you.

Ravi

----Original Message Follows----
From: TaxHelp@hal1.ausc.irs.gov
To:
Subject: IRS Email Tax Law Assistance



NOTE: Our response to your tax law question appears below. If you have a
follow-up question or another general tax law question, please return to our
web site at: (http://www.irs.gov/help/page/0,,id=13162,00.html) to submit
it. Please do not use your "reply" button to respond to this message. More
helpful information is provided at the end of this message.


For privacy and security purposes, your incoming e-mail text has been
deleted in this response because it either asked a tax account question,
which we do not answer (we answer tax law issues only), or it contained
personal identification information.


The Answer To Your Question Is:
Dear Taxpayer: Thank you for your inquiry.

Yes, once you meet the substantial presence test, you will become a resident
alien for U.S. tax purposes. As a resident alien you may become a
shareholder of an S Corporation. However, in the event that you should
leave the United States and become a nonresident alien, you will no longer
be eligible as a shareholder of an S Corporation. You will be required to
sell or trade your shares of the S Corporation since you become a
nonresident once you leave the U.S.

IRS forms and publications may be accessed on our web site at the following
address: http://www.irs.gov/formspubs/index.html or ordered through our
toll-free forms lines at:
800-829-1040 IRS Tax Help Line for Individuals
(NEW) 800-829-4933 Business and Specialty Tax Help Line
(NEW) 800-829-1954 Refund Hotline

which are available 24 hours a day, 7 days a week, with 7-10 days delivery
time.

We are interested in your opinion and providing the best possible service to
you. Please take a moment to answer our survey at:
http://www.irs.gov/help/page/0,,id=13155,00.html
This answer is based on our understanding of the facts you presented in your
question. Omission of facts may affect the answer given.

Here's a tip for navigating the IRS web site. Use the "search" button at the
bottom of the home page. Enter key words or phrases for your topic in the
entry box. It could help you find your answer immediately.


EMPLOYEE ID: 28-27455 Mrs. Sellecchia Tel.:English--(215) 516-2000
Spanish--(800)-829-1040 msg#: 1290224

[ravi_comp]

I did consult with a lawyer and he confirmed that we can be a shareholder of an S Corp. I didnot mention it earlier because i cannot provide written proof and you will have to take my word for it. I agree with you that there are some websites which say that a H1B holder cannot be a shareholder of a Corp (most of these are immigration websites as INS defines H1B's as non resident aliens) but they are mistaken as they donot know the Tax laws. I am surprised how you can dismiss a written notification from IRS online help desk and a posting from a well known Tax expert like Kaye Thomas.
Can you can substantiate your statement with some link from IRS or SBA etc.?
Ravi

[ravi_comp]

Atleast the people at the IRS help desk know better than you and me. IRS help desk has people specialized in different subsections of the IRS code and your question goes to the their specialist. I have used this services for years and think it is reliable and usefull. How can you say they are wrong unless you are a lawyer or a tax consultant who has read the tax code.

Quote
__________________________________________________ _
Well, the tax code is very complicated, and I doubt that the people at the IRS help desk know all the fine details.
__________________________________________________ _

Here is the link i am reposting. http://www.board.fairmark.com/board1/messages/21056.htm
This is a well know website run by a well known tax expert. The fact that you havn't heard of him doesn't mean he is non a well know tax consultant.

Quote
__________________________________________________ _
Where in this thread? And who is that person anyway? I have never heard of him/her.
__________________________________________________ _

It is quite widely known and the fact that you havn't heard of it doen't meen it is not so.

Quote

__________________________________________________ __
However, if such a thing was possible, it would be likely that it was quite widely known, which does not seem to be the case. Common sense would be that tax lawyers know about it and can point you to a written legal opinion about it.

__________________________________________________ __

Finally lets stop the discussion at this unless you can substantiate your statement. I have consulted a lawyer, shown you 2 E-Mail responses from IRS help line and response from a well known Tax Consultant kayle Thomas. It is upto the readers to do the necessary research on their end before they decide on the appropriate structure of a corporation. My previous posts were posted to ensure that the people on the forum are not misled. Just as you spend a lot of time on this board on immigration issues i spend a lot of my time discussing tax issues on message boards as that is my area of interest so i have done some reasearch on my end before making my posts and this doesn't seem to be the case with your posts. Finally, don't take this personally.

Thanks

Ravi

[enterpriner]

ravi_comp:

Why are you so keen on S-Crop compare to LLC ? You have done lot of research on this looks so you defanetly know you can have share in LLC, even you are out of country.
I am queries what is it driving you to S-Crop.

- Ent..

[ravi_comp]

Read the link below.
http://www.legalzoom.com/law_library...pared_LLC.html

As you grow the 15.3% additional tax on profits can be significant for LLC's. Also keep in mind that you cannot convert an LLC to a corporation or vice-versa.

So it is prudent to go for a S Corp rather than a LLC.

Thanks

Ravi

[CelticFlyer]

It is the references to "US citizens and Permanent residents" as valid S Corp shareholders that are wrong.

I have looked at the relevant statutes myself and the IRS helpdesk reply is correct. It is the IRS's definition of resident alien that matters and that is covered in publication 519.

All the IRS care about is that shareholders of an entity filing under chapter S are themselves subject to the full US tax regime.

US citizens are subject to US taxes and so are what the IRS calls "resident aliens". The IRS's definition of resident aliens *includes* the INS grouping of "permanent residents" (typically green card holders) but it is not limited to that group. Importantly it also includes aliens who meet the substantive presence test.

Provided all shareholders are either US citizens or resident aliens (*and are filing taxes as such*) in a given tax year an entity should meet the relevant shareholder requirement under chapter S for the corresponding year. A shareholder transitioning during a "dual status" year would probably fail the test.

The IRS regulations are designed to ensure that distributions from pass through entities ("S Corps") to shareholders do then appear on US tax returns as income of the shareholders. Otherwise IRS would be allowing the chapter S entity to pass through income and then IRS would not see that income on personal tax filings. US citizens and resident aliens all have to file US taxes and would have to declare income allocated to them by the pass through entity (and shown on an 1120S given by entity to shareholder). Though it appears as clear as mud it is actually very logical.

[CelticFlyer]

Originally posted by enterpriner
Looks like Limited Liability Company (LLC) is better option than S Crop for small business & companies.

This does not have the limitaion of only GC's etc. You can have any one in the world as your partner or owner it self.

It also has an advantage of pass-throw taxes.

I don't think you can have it both ways. True you can have shareholders from anywhere - but then so can C corps. If you want IRS to accept a Chapter S election I think they will apply the same shareholder test as for Chapter S Corporation.