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Filing taxes from abroad often differs from filing within the US. Sometimes in good ways — for example, many expats qualify for unique tax breaks like the Foreign Tax Credit (FTC) or the Foreign Earned Income Exclusion (FEIE). However, life abroad can also trigger new or different reporting obligations. Those with a foreign partnership, for example, must file Form 8865.
But who exactly must file Form 8865, what information does it cover, and how do you complete it? Read on for answers to all of these foreign partnership reporting questions and more.
What is Form 8865?
Form 8865 — Return of U.S. Persons With Respect to Certain Foreign Partnerships — is for disclosing information related to foreign partnerships. The IRS defines foreign partnerships as “any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations.”
Note that although this form includes the word “Return” in its name, it doesn’t mean that it will be your primary income tax filing form. Rather, it is a supplemental form that you will file in addition to your primary return (for US taxpayer partners, this is usually Form 1040).
Who has to file Form 8865?
Those who fall into at least one of the categories below during the relevant tax year are required to file Form 8865:
- Category 1 filers: Any American with control of (i.e. more than a 50% interest in) a foreign partnership
- Category 2 filers: Any American with at least a 10% interest in a foreign partnership controlled by Americans who own at least 10% each
- Category 3 filers: Any American who contributed property in exchange for interest in a foreign partnership when a) the interest was at least 10% or b) the value of the property exceeded $100,000
- Category 4 filers: Any American who acquired or disposed of at least a 10% share in a foreign partnership
Step-by-step guide to filling out Form 8865
At six pages, Form 8865 is fairly extensive, requiring detailed information on the partnership’s owners, income, transactions, and more. To accurately report this information, you’ll need to keep detailed business records throughout the year.
Up top, you’ll fill out some basic information about yourself, including your name, address, which category you fall into, and what share you own of the business. You’ll also enter details about your foreign partnership, such as the name and address, business activity, currency, and information on the other partners.
In lines 5-14, you’ll answer questions about the partnership and its activities. Most of these are “yes” or “no” questions, e.g., “Is the partnership a 721(c) partnership?” Others, however, will require you to enter information, such as how the foreign country the partnership is registered in classifies the partnership.
Below these questions are fields where you and/or a preparer can sign the form.
Schedule A to Schedule A-3
Schedule A is for reporting ownership type. If you hold a direct interest in a foreign partnership, you’ll check box A. Box B is for those who own a constructive ownership interest. Constructive ownership occurs when an entity or individual indirectly holds an interest in a foreign partnership through a chain of ownership in other entities.
Example: Jamie is an expat who lives in Ireland and owns a PR firm: Media Solutions Inc., a US-registered C Corporation. Last year, his C Corp bought out an Irish competitor, Connor & Sullivan LLP. While Jamie himself doesn’t directly hold an interest in the partnership, the C Corp he owns does. Therefore, Jamie holds a constructive interest in the Irish-based partnership.
If you hold constructive interest in a foreign partnership, you’ll check box B and share information about the person (or people) whose interest is constructively owned.
In Schedule A-1, you’ll share information about any person who owns an indirect interest in a foreign partnership through IRS attribution rules. These rules typically attribute ownership to family members, related entities, or those with control over entities that hold an interest in a foreign partnership (for example, if a spouse holds ownership).
In Schedule A-2, you’ll share information about any foreign partners involved in a Section 721(c) partnership. This type of partnership occurs when US partners transfer property that has increased in value to a partnership with foreign partners.
In Schedule A-3, you’ll share information about any partnerships in which the foreign partnership has a direct interest or at least a 10% indirect interest.
Schedule B: Income Statement — Trade or Business Income
Schedule B is for reporting the foreign partnership’s ordinary trade or business throughout the year. In the first section (lines 1a-8), you’ll disclose information related to income. In the second section (lines 9-21), you’ll disclose information related to deductions. On line 22, you’ll report the partnership’s total income or losses.
Schedule K: Partners’ Distributive Share Items
Schedule K is for reporting your proportional share of the foreign partnership’s various financial items, including:
- Income/loss
- Deductions
- Self-employment income/loss
- Tax credits
- International tax information
- Note: If you have international tax information to report, you must do so on a separate Schedule K-2 (Form 8865).
- Alternative minimum tax
Completing this section will give you the information that you need to include on your personal tax return.
Schedule L: Balance Sheets per Books
In Schedule L, you’ll disclose your financial position at the beginning of the tax year (columns A/B) and the end of the tax year (columns C/D). The various financial items listed include both assets as well as liabilities and capital. This helps the IRS assess and verify your partnership’s financial situation.
B!T note: Those who have responded “Yes” to Item H11, page 1, do not need to complete Schedules L, M-1, or M-2.
Schedule M to Schedule M-2
In Schedule M, you’ll share balance sheet information specifically dealing with your foreign partnership’s interest allocations at the beginning (column A) and end (column B) of the tax year. It’s especially important for partnerships that have debts, as it helps partners clarify their proportional share of interest expenses, which they will then include on their tax returns.
Schedule M-1 is for explaining the differences between the income/loss on a partnership’s financial books and the income/loss on its tax return. It accounts for depreciation, non-deductible expenses, and income not yet included in the return, among other factors. This helps the IRS verify the accuracy of your business records and ensure reporting compliance.
In Schedule M-2, you’ll share information about the partners’ capital accounts, which track the equity of partners or owners in a partnership or other type of business entity.
You’ll need to enter the capital account balance at the beginning of the year, the amount of capital contributed, and the amount of capital distributed, among other financial items. This helps you understand your equity and how it has changed over time, which may impact your tax and reporting obligations.
Schedule N: Transactions Between Controlled Foreign Partnership and Partners or Other Related Entities
The last section of Form 8865 — Schedule N — is for reporting certain types of transactions between a controlled foreign partnership and its partners or other related business entities.
In particular, you’ll disclose transactions that could impact the partnership’s income, deductions, or credits. This might include sales, purchases, payments, or other financial activities. You’ll also report the value of the transactions and list the partners or related entities involved.
This helps the IRS verify that your partnership complies with your tax and reporting obligations.
Filing requirements & deadline
Form 8865 has the same deadline as the rest of your tax return, as it’s filed along with it. While the standard tax deadline is April 15th, Americans abroad have an automatic two-month extension to June 15th. You can extend this to October 15th by filing Form 4868 — or even to December 15th with a written request to the IRS.
Regardless of when you file your tax return, though, you’ll have to make an estimated tax payment by April 15th.
Failing to file Form 8865 — even unintentionally — can come with significant consequences. Failures to file Form 8865 result in a penalty of $10,000 per instance. If you still haven’t filed after 90 days, you’ll face an additional $10,000 for each month up to a maximum of $60,000 per instance.
The IRS also levies penalties on those who fail to properly report a transfer or contribution at a rate of 10% of the unreported value. In such cases, the penalty maxes out at $100,000 unless the failure to file was intentional.
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