Form 1120-F: What Business Owners Need to Know

Tax compliance is a major consideration for any business owner, particularly when dealing with international tax obligations. Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, plays a crucial role in how foreign corporations with U.S. business activities report their income and calculate their tax liabilities. Despite its importance, many international business owners are still unfamiliar with the specifics of this form and its relevance to their operations.

In this article, we will delve into the nuances of Form 1120-F, exploring its significance for business owners involved in international operations. From who needs to file this form, to what it entails, and the potential consequences of non-compliance, we aim to provide a comprehensive overview. Whether you are a business owner with foreign connections, or a tax professional advising international clients, gaining a thorough understanding of Form 1120-F will be invaluable in ensuring legal compliance and optimizing tax strategies.

What is a foreign corporation for US tax purposes?

The definition of a foreign corporation is straightforward enough: A corporation registered  outside the United States. 

But, why would a foreign-registered business be worried about US tax law, you might ask? There are many reasons that a foreign corporation might have US tax reporting requirements, despite their place of incorporation being abroad.

A US tax reporting requirement can be triggered if, the foreign corporation has some type of business connection with the US (more on that next).

But first, what are some examples of foreign corporations? A foreign corporation can take many forms, even within the same country, based on variations in structure and ownership. Some examples of foreign corporations include:

• Aktiengesellschaft (AG) in Germany
• Società per Azioni (S.p.A.) in Italy
• Public limited company (plc) in the United Kingdom
• Sociedad anónima (S.A.) in Colombia

Since there may not be a 1-to-1 equivalent of a US corporation in your country, generally any foreign corporate structure with shareholders who have limited liability will meet the criteria of a foreign corporation under US law. 

Which corporations have to file IRS Form 1120-F?

Business owners with a foreign registered corporation that meets certain criteria have to file Form 1120-F.¹ According to the IRS, “A foreign corporation files Form 1120-F to report their income, gains, losses, deductions, credits, and to figure their U.S. income tax liability.” 

These include if:

• the corporation was engaged in a trade or business in the US
• the corporation had income, gains, or losses that were ‘effectively connected’ to trade or business in the US
• the corporation had income from a US source that wasn’t subject to withholding tax at source
• the corporation overpaid US tax and needs to claim a refund
• the corporation wants to claim any US credits or benefits
• the corporation wants to claim the benefit of a US international tax treaty (Form 8833 must also be filed).

The term ‘effectively connected’ generally refers to when a foreign corporation has premises, production, or employees in the US.

Filing deadline for US income tax return of a foreign corporation

The due date for filing Form 1120-F depends on whether the corporation has premises in the US. If it does, the filing date is March 15. If it doesn’t, the deadline is June 15.

Request an extension to file Form 1120-F

If necessary, a six-month extension can be requested by filing Form 7004, and, it is possible to e-file this request.²

How to file: Form 1120-F instructions 

The current version of Form 1120-F is eight pages long and asks detailed questions about your company’s finances and operations. 

You may be an expert on your business finances and be comfortable tackling 1120-F on your own. But getting it wrong could mean paying penalties and interest.

Form 1120-F is one of the more complex forms you may encounter as a business owner, especially if you’re not familiar with the US tax system. So don’t take chances and instead work with an experienced expat CPA to get it right.

Example of completed Form 1120-F

Penalties for not filing IRS Form 1120-F

IRS penalties for failing to file the US Income Tax Return of a Foreign Corporation start at 5% of the unpaid corporation tax owed. This increases to 25% after five months.

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References

1. Form 1120-F – IRS website
2. Form 7004