Bookkeeping for a Foreign-Owned US LLC or Corporation

What must the books of a foreign-owned US LLC or corporation show?

A US LLC or corporation with a foreign owner must keep permanent, accurate and complete books of its income, deductions and credits, plus the records that show how it dealt with its owner and other related parties. Every person subject to US tax, or required to file an information return, must keep books (26 CFR 1.6001-1). Foreign ownership adds a duty to show who the company dealt with, for how much and why (Form 5472 instructions; 26 CFR 1.6038A-3).

That duty applies to a "reporting corporation": a US corporation in which one foreign person holds, directly or indirectly, at least 25% of the vote or value at any time in the year, or a US LLC wholly owned by one foreign person that has not elected to be taxed as a corporation, which counts as a corporation for these rules only. An LLC that did elect is an ordinary corporation here. A reporting corporation files Form 5472 for each related party it had a reportable transaction with, and the books must support every figure on it.

A case is not simple when owner money moves through personal or foreign accounts, the company deals with your other companies, family or a foreign parent, years of books or Form 5472 filings are missing, or the company has employees, collects sales tax or gains a second owner. In those cases the books may need a professional's review before a return rests on them.

Gather first: formation papers, the operating agreement or share register, the EIN confirmation letter, every bank and card statement since formation (including personal or foreign accounts that paid company costs), a list of every transfer between you and the company, contracts and loan agreements with related companies or family, and prior returns.

The books also feed the US return. A foreign-owned single-member LLC has no income tax return of its own, but in any year with a reportable transaction it files a pro forma Form 1120, mostly blank, with Form 5472 attached (Form 5472 instructions; detail in foreign-owned single-member LLC filing). A foreign-owned corporation attaches Form 5472 to its Form 1120 in the same years (Form 1120 instructions). Whether the owner owes US tax on the profit is a separate question: see when foreign owners owe US tax.

Who keeps the books: me, a US bookkeeper or my accountant abroad?

Any of them can, because the record rules do not say who must enter the transactions. The statute lets the company keep the records or cause another person to keep them (26 USC 6038A(a)). The regulation lets the company, a foreign related party (often the owner) or a third party hold them, if the location rules below are met (26 CFR 1.6038A-3(b)(2)). The penalty for missing records falls on the company, not on whoever keeps them (26 USC 6038A(d)).

The choice is practical, not a tax rule:

Software and hiring choices are in doing your own books or hiring a bookkeeper. If a bookkeeper's mistake causes a penalty, see bookkeeper mistakes and who pays.

Which owner transactions go on Form 5472, and how should the books mark them?

Form 5472 reports a company's transactions with its related parties. A transaction is any sale, loan, advance, contribution or other transfer of money or property, and any service, whether or not it is written down (26 CFR 1.482-1(i)(7)). With a foreign related party, what is reportable depends on the entity (26 CFR 1.6038A-2(b)(3) and (4)):

Parts IV to VI are sections of Form 5472: IV lists money dealings, V the other transactions of a foreign-owned LLC, VI non-cash and below-value dealings. Whether an item falls under a listed type can turn on the facts, so have a preparer confirm it before it is left out of the log.

In Parts IV and VI, an amount in a transaction or series of transactions with a foreign related party that totals no more than $50,000 may be reported as that amount or less (Form 5472 instructions). The Part V instructions mention no such shortcut, so list those items at their actual amounts. The ledger should still hold every item, because the IRS can ask for the records.

To mark these in the books:

• Create a contact for the owner and for every related person or company. Keep its name, address, country of tax residence, tax ID if it has one, nature of business and relationship to the company, which are the details Form 5472 asks for (26 CFR 1.6038A-2(b)(2)).
• Tag each transaction with its type: sale, purchase, rent, royalty, service, commission, loan, interest, contribution or distribution.
• Store the original-currency amount, the rate and the US-dollar amount on every line.
• Run a report by related party and year. A separate Form 5472 is due for each related party with a reportable transaction (26 CFR 1.6038A-2(a)(1)).

The log layout and which transfers count are in transaction records for a foreign-owned LLC.

How do I record money I put in and take out?

A transfer is a contribution, a loan or a payment for something depending on its real terms. Agree the terms in writing before the money moves and let the books show them. What each one means on Form 5472 is in the table above.

A corporation must keep the documents that establish the US tax treatment of a foreign holder's capital contributions, dividends and loans (26 CFR 1.6038A-3(a)(3), Example 2). Loans are reported in Part IV by their balances; capital contributions and dividends have no line of their own there.

How to decide between a loan and a contribution is in owner contribution or loan to your LLC, funding a corporation from abroad in putting money into your US corporation from abroad, and money from relatives in money from family abroad. US-source interest, dividends, rent and similar payments to a foreign person can also carry US withholding, and the company as payer is liable for tax it should have withheld (26 USC 1441; 26 USC 1442; 26 USC 1461); paying yourself as a foreign owner covers which.

What about payments to my other companies, family or a foreign parent?

Payments to your other companies, family or a foreign parent are related-party dealings, handled like dealings with you. Form 5472 treats as a related party the foreign owner holding at least 25%, anyone related to the company or to that owner under the tax code's family and control tests, and anyone related under its section 482 rules (Form 5472 instructions).

The family test covers brothers and sisters, a spouse, ancestors (parents, grandparents and further back) and lineal descendants (children, grandchildren and further down). The control test covers a company the owner holds more than half of, counting shares held by the owner's family, such as a sister company abroad that bills the US company (26 USC 267(b) and (c)). A relative or company that is a US person is a domestic related party. Parts IV to VI do not itemize those dealings, but a separate Form 5472 can still be due for that party, and the books still record them (Form 5472 instructions).

Mark each as a related party. A fee paid to a relative for work is a service payment. Free help from a sister company's staff or office is a dealing below full value, described with an estimate of its worth (Part VI). Keep contracts, invoices, time records and anything showing how the price was set; the regulation's record list reaches records a foreign related party holds about these dealings (26 CFR 1.6038A-3(a)(1) and (c)(2)).

Do I need a separate US bank account?

No Form 5472 or record rule requires one. The IRS does tell a new business to open a business checking account and keep it separate from a personal account (Publication 583). That is guidance, not law, but it keeps every company dealing visible on the company's own statements. Banks and payment platforms set their own rules: see US address and bank account from abroad.

If you pay company costs from your own account or card, each payment may be a transfer of money to the company on your behalf (26 CFR 1.482-1(i)(7)). If it is, record it on the payment date at that day's rate and keep the statement. Whether it is a contribution or an amount owed to you depends on the terms: see business expenses on a personal card.

If customers pay your personal or foreign account, the money may still be company income, because the books must establish the company's gross income (26 CFR 1.6001-1(a)). Record the sale and what you passed on to the company; platform payouts are in marketplace payouts in a foreign-owned LLC.

A company that holds an account abroad may have its own FBAR duty: see FBAR for company accounts abroad.

Which currency do the books use, and what exchange rates does the return use?

US dollars, with the original currency saved on each line. Form 5472 amounts must be in US dollars with a statement of the exchange rates used (26 CFR 1.6038A-2(c)), and the instructions ask for a schedule of the rates (Form 5472 instructions).

The IRS says the dollar is the functional currency for all taxpayers except some qualified business units, separate units of a business with their own books. A company run entirely abroad in a local currency may be one, and a preparer should decide (IRS: foreign currency).

Translate each item at the rate prevailing when the company receives, pays or accrues it. The IRS has no official exchange rate and generally accepts any posted rate used consistently (IRS: exchange rates). Keep the rate's source on every line; the Form 5472 rate schedule comes from those lines. Currency gains and losses on foreign-currency balances are in foreign currency accounts in US books.

Do the records have to be kept in the US or in English?

Records tied to related-party dealings must be kept in the US unless a small-company exception applies or the company meets the conditions for keeping them abroad.

A corporation is outside these special record rules, though not outside Form 5472 or ordinary tax records, if its US gross receipts are under $10,000,000, or its gross payments to and from foreign related parties are at most $5,000,000 and under 10% of its US gross income. Related reporting corporations are counted together. A foreign-owned LLC with no tax election cannot use either exception (26 CFR 1.6038A-1(h) and (i)).

Without an exception, for records it does not ordinarily keep in the US, the company must either deliver the requested originals or copies to the IRS within 60 days of the request, or move them to the US within that time with an index and a US custodian (26 CFR 1.6038A-3(f)).

Other records can stay in another language. The company must supply English translations of specific documents within 30 days of a request (26 CFR 1.6038A-3(b)(3)). Statements attached to Form 5472 must be in English (26 CFR 1.6038A-2(c)).

Cash or accrual: what does Form 5472 count as paid and received?

An accrual-method company counts related-party amounts when they accrue, not only when paid. The regulation and the instructions both require an accrual-method company to use accrued payments and receipts, and the instructions add that for Parts IV and VI "paid" and "received" include accrued amounts (Form 5472 instructions; 26 CFR 1.6038A-2(b)(10)). A related company's invoice unpaid at year end belongs in that year's related-party records.

The rule for a cash-method company is less clear: the Parts IV and VI note is not limited to accrual-method companies, while the general rule and the regulation speak only to them. Until a preparer says otherwise, keep a separate list of related-party invoices by date billed as well as by date paid; the ledger itself follows the company's accounting method.

Loans are reported as opening and closing balances or a monthly average, not as the sum of each advance. The books and the tax return must use the same accounting method (Publication 583); see cash or accrual for a small business.

Reporting an accrued amount on Form 5472 does not decide when it is deductible. For amounts owed to a related foreign person, such as interest accrued to the owner, the statute directs regulations that let the payer deduct them only when paid, with exceptions (26 USC 267(a)(3)). Give the preparer the unpaid related-party balances and what each one is for.

How long do I keep the records, and what do missing records cost?

Keep records as long as they may matter to a related-party dealing, and never for less than the time the IRS can assess or collect tax for the year they affect (26 CFR 1.6038A-3(g); 26 CFR 1.6001-1(e)).

Missing records can cost the company in three ways:

• $25,000 for each tax year in which it fails to file Form 5472 correctly or to keep the records the regulation requires. The regulation applies the penalty once per related party per year, so two related parties can mean two penalties. A substantially incomplete form counts as not filed (26 USC 6038A(d); 26 CFR 1.6038A-4).
• Another $25,000 for each related party, for each 30-day period or part of one that the failure continues after 90 days from the IRS notice.
• If the IRS summons records about a dealing with a foreign related party and the company cannot produce them because it did not keep them, the IRS may set the deduction or cost for that dealing in its sole discretion (26 USC 6038A(e)).

Missed years and penalty relief are in missed Form 5472 and penalty relief.

What should a new Delaware or other US company have ready in its first year?

Set up in this order:

1. Start the books on the formation date, with formation fees and the owner's first contribution (setting up books for a new LLC).
2. Open a business account. Before the first transfer, set up separate accounts for owner contributions, distributions and loans from the owner, and create the related-party contacts and tags.
3. Log every owner transfer when it happens (date, amount, currency, rate, label), with the contribution or loan terms written down first.
4. Reconcile the bank and owner accounts each month (good practice, not a rule). At year end, run the related-party report and save the exchange-rate schedule.

Form 5472 goes in with the company's return, by that return's due date including extensions: generally the 15th day of the fourth month after the tax year ends, April 15 for a calendar year, with up to six months more on Form 7004 filed by that date (Form 5472 instructions; Form 1120 instructions; Form 7004 instructions). How a foreign-owned LLC files it is in foreign-owned single-member LLC filing.

Any case listed in the first section is a reason to bring in a US bookkeeper before the first return. A year with no log, or owner money through personal or foreign accounts, means dated support must be rebuilt for every transfer. A second owner ends the "wholly owned" status the single-member LLC rules rest on (Form 5472 instructions). The LLC is then a partnership unless it elects corporate treatment (26 CFR 301.7701-3(b)(1)).

Example

These examples are illustrative. Amounts are in US dollars unless another currency is named. In each, the owner is not a US citizen or tax resident, and no LLC has elected to be taxed as a corporation.

A designer abroad with a Delaware single-member LLC

A designer in Tel Aviv owns a Delaware single-member LLC. It bills US$80,000 to unrelated clients, so those sales are not related-party dealings and Form 5472 does not list them. The designer pays US$6,000 of software on a personal card in shekels. The bookkeeper enters each charge on its own date with the shekel amount, that day's posted rate and the US-dollar amount, as the software expense matched by a contribution or an amount the LLC owes the designer, whichever was agreed beforehand. If it is a contribution, it goes on the Part V statement. If it is a loan, it adds to the loan balance. Either way the shekel rate goes in the rate schedule.

A corporation buying from a sister company

A Shenzhen owner's Wyoming C corporation buys US$40,000 of services from a Hong Kong sister company in four invoices of US$10,000. Each invoice is a related-party purchase, kept with its date, original-currency amount and rate. Assume the corporation uses the accrual method for US tax and the services were performed in December: that invoice, paid in January, belongs in December's related-party records. Whether the cost is deductible that year is for the preparer to settle, as above. The form lets an amount of US$50,000 or less be reported as "$50,000 or less", but the ledger still holds every invoice.

A Vancouver owner funding a US LLC

A Vancouver owner funds a US single-member LLC with four transfers totalling US$25,000: US$5,000 on Jan 15, US$8,000 on Mar 3, US$7,000 on Jun 20 and US$5,000 on Sep 9. On Nov 14 the LLC sends US$10,000 back. Each movement needs a date, an amount and a label: the four transfers are contributions and the payment back is a distribution. The LLC lists all five on its Part V statement, and any converted from Canadian dollars go in the rate schedule. Canada has its own rules for an owner of a US LLC: see Canadian owner of a US LLC.

Different for you?

• The company has run a year or more with no transaction log, or owner money went through personal or foreign accounts. The books may need dated support rebuilt for each transfer before the company files: see rebuilding books for missed foreign-owner filings and bookkeeping help.
• A first Form 5472 is due, one was missed, or a notice arrived. The filing depends on the books for those years: see missed Form 5472 and penalty relief, with catch-up bookkeeping for those years.
• Your accountant abroad keeps the US books but not in US dollars, or without owner transfers tagged. The ledgers may need converting and tagging, going forward and for past years: see US bookkeeping.
• The company adds employees, sales tax or a second owner. Payroll and sales tax add monthly records: consider monthly bookkeeping. For a second owner, see a company with a foreign co-owner.
• Your company is a US subsidiary of a foreign company, or sells through marketplaces. See books for a US subsidiary of a foreign parent and marketplace payouts in a foreign-owned LLC.
• You want to pay yourself, or your preparer asks for the books behind a corporation return. See paying yourself as a foreign owner and what your preparer needs for a foreign-owned corporation.
• You live in the US, hold a green card, or have a joint-return election in effect. A US citizen, a US tax resident through the green card or substantial presence test, and an individual with a section 6013(g) or (h) joint-return election in effect are not foreign persons here, and then Form 5472 may not apply (IRS: tax residency; 26 CFR 1.6038A-1(f)(1)). See cross-border tax.