1120S Shed K "Foreign Transaction"

Technical topics regarding tax preparation.
#1
Posts:
47
Joined:
22-Dec-2018 9:15pm
Location:
MI
https://www.irs.gov/pub/irs-pdf/i1120s.pdf
https://www.irs.gov/pub/irs-pdf/f1120s.pdf

On the 1120S Schedule K "Foreign Transactions" line 14 confuses me. Some of my income is foreign sourced (e-commerce).

Is filling this section required? Or only if I am requesting foreign tax credits or one of the shareholders sold personal property?

For example, if my S-Corp had 100k in sales in Canada 100k on line 14G and 14E? This section is incredibly confusing.
 

#2
Posts:
1716
Joined:
28-Jul-2017 12:08pm
Location:
Somewhere out there...
I could be wrong, but sales of personal property from a US location to a foreign customer ( not through a foreign branch) would not be considered foreign source

https://www.irs.gov/pub/int_practice_un ... _02_05.pdf
 

#3
Posts:
47
Joined:
22-Dec-2018 9:15pm
Location:
MI
To clarify, the S-corp is selling products (inventory) in Canada to Canadian customers. The products are located in a warehouse in Canada. It has no offices or permanent establishment in Canada.
 

#4
Posts:
1716
Joined:
28-Jul-2017 12:08pm
Location:
Somewhere out there...
So would that mean there would be a PE, but for the treaty position? Are they filing a return in Canada to claim any treaty benefits?
 

#5
Posts:
47
Joined:
22-Dec-2018 9:15pm
Location:
MI
I ran this by an accountant and I was told verbatim:

"You will not be liable for Canadian income tax on the sales made to Canadian customers so long as you do not maintain a PE in Canada. A PE excludes a warehouse for the distribution of goods."

I will be required to still file a Canadian Corp return, specifically: "T2 Treaty Based Corporate Tax Return, along with Schedules 91, 97 and NR303 (hybrid entities)".

However, I am unsure about the 1120S section K "foreign transactions" treatment. Im getting different answers from accountants I run this by.
 

#6
Posts:
1716
Joined:
28-Jul-2017 12:08pm
Location:
Somewhere out there...
I’m not surprised, without clearly laying out the facts, “accountants “ are inclined to guess at what the answer could be by assuming certain facts. (I’m guilty of this as well.)

So you are now in a different land; it sounds like the taxpayer would be subject to Canadian tax, but for the treaty. So the code would say you have a branch in Canada ; the treaty overrides that and says no branch for purposes of Canada’s ability to tax the income.

Have you checked the sourcing rules to see if there is a discussion related to treaty positions? Also, did you check the IRS guidance regarding source of income when there is a treaty position?
 

#7
Posts:
47
Joined:
22-Dec-2018 9:15pm
Location:
MI
The quote from the accountant above was who I consulted when I first set up my US S-Corp to confirm my income tax obligations. I will be required to file a Canadian corporate income return (T2) and will claim exemption from Canadian income taxes with the treaty.

Ive been digging to see what the IRS considers "Foreign Transactions" for the 1120S Schedule K but cant find a clear answer. With the added complexity of the treaty I am unsure.

So far it appears this Canadian income is not "foreign" as its earned by my US S-Corp. I was hoping some others who seen similar cases could shine some light and if completing "Foreign Transactions" on the 1120S would be required.
 

#8
Posts:
1716
Joined:
28-Jul-2017 12:08pm
Location:
Somewhere out there...
Without doing further research, my inclination is to say none of the sales to Canada are foreign source because the treaty position says there is no branch or permanent establishment in Canada, therefore (it would follow) no foreign source (branch) income

If you took the position this was foreign branch income, you would need to file form 8858, etc.
 


Return to Taxation



Who is online

Users browsing this forum: DAJCPA, Google [Bot], kathyt, ManVsTax, mariaku, MilesR, TAXMASTER, Trailman423, Wiles and 159 guests