Can anyone qualify to own an S-Corporation?

Business Incorporation in Illinois is one of our Accountants in Chicago specialty. That’s why it is very important to know which are the tax savings from operating your ordinary income business under an S-Corp.  However, not everyone is a qualifying shareholder of an S-Corporation.  If you are from a foreign country living here in the U.S. with a ‘Visa’ or ‘Green Card’ it’s critical to know what the rules are.

Here are the two rules that would make you qualify to be a shareholder of an S-Corp.

  1. You need to be a “Resident Alien”, there are a few tests to determine that. 
    1. one is the “Green Card” test; this where the alien actually has to be a lawful permanent resident with a green card (Immigration Form I-551); if you have one of these documents it doesn’t matter how long you’ve been present in the country, you can qualify as an S-Corporation shareholder.  However, if your Visa is a non-immigrant visa, then that would not constitute lawful permanent residence, so you wouldn’t qualify under this test.
    2. b.      or you need to pass the  “Substantial Presence Test”, this test is essentially mathematical, it is satisfied if the alien individual is physically present in the United States for the requisite amount of time, either for the calendar year in question or for the three-year period that ends with the year in question. For purposes of the test, presence during any portion of a day is considered presence for a full day.
    3. The “Substantial Presence Test” is met in either of the following circumstances:
  • The alien is physically present in the United States for 183 days or more during the target calendar year, or
  • He is present in the United States for at least 31 days for the year in question and has been present for 183 days which are the sum of (a) days during the target year counted as full days, plus (b) days in the first preceding year counted as one-third days, plus (c) days in the second preceding year counted as one-sixth days.

In sum, if you have a ‘Green Card”, if you have been living in the U.S. for 183 days or more during the calendar year, then you would meet this test and be eligible to be a shareholder of an S-Corp.  Remember you need to continue to meet this test every year until you actually get the “Green Card”. Sounds easy right?

For more questions regarding Business Incorporation in Illinois you can call us at 773-728-1500.

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Foreign Financial Accounts / Signature / Authority over foreign financial accounts

As a CPA in Chicago, I had received a lot of calls regarding the issue of Foreign Financial Accounts.  Apparently, this was a hot topic last year.  Every U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts (including bank, securities and other types of financial accounts in a foreign country), if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report those relationships to the U.S. government each calendar year.

The government uses this reporting mechanism as a means to uncover hidden foreign accountsand ensure that investment income earned in foreign countries by U.S. taxpayers is included on their U.S. tax returns. The Treasury Department has placed a new emphasis on foreign accounts, and taxpayers with a financial connection to a foreign country should determine whether they have a reporting requirement.

Reporting is accomplished by filing a Report of Foreign Bank and Financial Accounts form—more commonly referred to as the FBAR—which must be received by the IRS at its Detroit office on or before June 30 of the succeeding year. Thus, the FBAR filing for the 2012 year must be received by the IRS no later than June 30, 2013. This report is filed separately from the taxpayer’s income tax return, and no extensions of time are available for filing this form. In addition, taxpayers generally are required to answer “yes” or “no” to questions related to foreign bank and financial accounts on their tax returns.

Penalties for failing to comply can be draconian. For non-willful violations, civil penalties of up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. A reasonable cause exception to the penalty is available for non-willful violations but not for willful violations.

Overlooked Accounts – Many taxpayers overlook the fact that they have a reporting requirement in situations such as the following:

  • Family Accounts – Recent immigrants to the U.S. may still have parents or other family members residing in the “old” country, and those relatives may have included them on an account in the foreign country. This is common practice for some ethnic groups. The taxpayer does not really consider the account his or hers, but it falls under the reporting requirement if he or she has signature or other authority over the account and the value exceeds $10,000.
  • Inherited Accounts – Inherited accounts in a foreign country fall under the FBAR reporting requirement even if the funds are subsequently transferred to the U.S. The FBAR rules state that reporting is required if at any time during the year the foreign account exceeds $10,000.
  • Business Accounts – An officer or board member may have signature authority over a business account held in a foreign country and overlook the need to meet the FBAR reporting requirements.

In addition to including any reportable foreign income on his or her tax return, the taxpayer must ensure that the foreign account questions are completed correctly on the tax return and that the FBAR is filed when required.

 

Please call us at 773-728-1500 if you have questions regarding Individual or Corporation Income tax and Foreign Financial Accounts.

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