As a U.S. expat, tax compliance can get complicated—especially when dealing with foreign business entities. If you own a Foreign Disregarded Entity (FDE) or operate a Foreign Branch (FB), the IRS requires you to file Form 8858, a specific tax form, to report its income, expenses, and financial activity.
For expats with foreign corporations, electing to treat the company as a disregarded entity can simplify tax filing and help avoid the more complex Form 5471.
In this guide, we’ll cover what Form 8858 is, who needs to file it, and how to stay compliant while avoiding common mistakes and penalties.
What is IRS Form 8858?
Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches, is an information return that helps taxpayers—including U.S. citizens, resident aliens, and foreign estates—report certain business interests in a foreign country.
It applies when you have a foreign disregarded entity (like a single member LLC) or a foreign branch operating abroad. Submitting a complete and accurate Form 8858 with your annual tax return is essential to avoid potential penalties, which can include civil and criminal penalties for non compliance.
What is a Foreign Disregarded Entity (FDE)?
A foreign disregarded entity is a business structure that the IRS ignores for federal income tax purposes, meaning its income and expenses are reported directly on the owner’s personal tax return. This setup simplifies tax reporting by treating the entity and its owner as a single taxpayer.
Who is Required to file Form 8858?
Form 8858 is the informational return used to report foreign disregarded entities (FDEs) or foreign branches (FBs) that a U.S. person owns or operates. Generally, you must file Form 8858 if:
- You are a U.S. person (e.g., a U.S. citizen or resident, domestic corporation, domestic partnership, or domestic trust) who is the tax owner of a foreign disregarded entity or has a foreign branch.
- You are a U.S. person who owns (directly or indirectly) a controlled foreign corporation or a controlled foreign partnership that, in turn, owns a foreign disregarded entity or has a foreign branch. In those situations, the U.S. person with the interest in the CFC or controlled foreign partnership may also be required to include Form 8858 with their return.
If you or your business is considered the “tax owner” of an FDE or a foreign branch, Form 8858 must typically be attached to your annual U.S. tax return. Failure to file can result in penalties, so it’s important to confirm your status each year and include Form 8858 if required.
U.S. Expats Can Elect to Treat a Foreign Corporation as Disregarded Entity
If you’re a U.S. expat who owns a foreign corporation, you can make an election to treat that corporation as a foreign disregarded entity—and in many cases, you absolutely should.
Here’s why:
- You file Form 8858 instead of Form 5471, which is far more complex and time-consuming.
- You avoid Subpart F income rules, which force you to pay U.S. taxes on certain foreign corporate earnings, even if you haven’t received them.
- You escape GILTI (Global Intangible Low-Taxed Income) taxation, which imposes additional U.S. tax on foreign corporate profits.
By making this election, your foreign corporation is no longer treated as a separate entity for tax purposes. Instead, it’s considered an extension of you, simplifying your tax obligations and reducing unnecessary filings. If you qualify for this election, it can be a game-changer in minimizing tax complexity. Additionally, making this election can also help in claiming the foreign tax credit more effectively.
What is the difference between Form 5471 and 8858?
Form 5471 is used to report ownership in a foreign corporation, while Form 8858 is used to report a foreign diregarded entitity.
If a U.S. expat owns a foreign corporation, they generally need to file Form 5471. However, if they elect to treat the corporation as a disregarded entity by filing Form 8832, they file Form 8858 instead, avoiding the complex reporting requirements of Form 5471, as well as Subpart F income and GILTI taxation.
Common Misconception: Foreign Rental Properties
I’ve seen many tax preparers wrongly claim that Form 8858 must be filed for personally owned foreign rental properties—this is simply not true. If you personally own a foreign rental property, it does not qualify as an FDE or FB. Instead, rental income is reported on Schedule E. Be cautious—some accountants use this misinformation to justify higher fees.
Would you like help determining whether you need to file Form 8858 in your situation? Contact us for free tax advice.
How to Make the Election?
A single-owner foreign corporation can elect disregarded entity status by:
- Completing Form 8832 (“Entity Classification Election”): Check “Other Entity” and write “Disregarded Entity.”
- Signing and dating the form: An authorized individual (e.g., officer or director) must sign.
- Filing the form with the IRS: Send it by mail or file electronically.
Only the corporation—not the owner—can make this election. It becomes effective on the date specified on Form 8832 (no more than 75 days before or 12 months after filing). For example, if formed on June 1, 2025, the election should be made by August 15, 2025.
What are the Penalties for Failure to File Form 8858?
If you fail to file Form 8858 (or file it incorrectly or incompletely), the IRS generally imposes:
- An initial $10,000 penalty for each Form 8858 you fail to file.
- Additional penalties of $10,000 for each 30-day period (or part thereof) after 90 days from the date you receive an IRS notice about the missing form—capped at a total of $50,000 per form.
- Reduction of Foreign Tax Credits: Failure to file can also result in a 10% reduction in your foreign tax credits, with the penalty escalating if the return is not filed within three months after receiving an IRS notification.
In addition, not filing Form 8858 can keep the statute of limitations open for your entire tax return, potentially exposing you to additional scrutiny or assessments.
Form 8858 Instructions
Below is an overview of the schedules in Form 8858. Each schedule serves a different tax purpose, from reporting your income statement to documenting transactions with related entities. If you’re the direct owner of an FDE or FB—or if your ownership is indirect through a corporation, consulting business, or self employed business—read on to understand how each part works.
Schedule C – Income Statement
Use Schedule C to report a summary income statement for your FDE or FB. You’ll calculate the entity’s income in its functional currency. For many taxpayers, especially those running a business in a foreign country, this schedule provides key data to determine your tax liability.
Schedule C-1 – Section 987 Gain or Loss
Complete Schedule C-1 if you have a foreign branch (a QBU) using a foreign functional currency. You’ll calculate and translate any profit or loss at the average exchange rate for the year. Properly reporting Section 987 amounts is critical for tax purposes and can affect your tax return.
Schedule F – Balance Sheet
Schedule F outlines the balance sheet for the foreign disregarded entity. You’ll present assets, liabilities, and equity in both the entity’s functional currency and, when necessary, U.S. dollars. This information is important if the FDE or FB is part of a larger organizational chart with other related entities.
Schedule G – Other Information
In Schedule G, you’ll answer questions about the disregarded entity’s corporation status, ownership, and general operations. This includes identifying any related entities, such as subsidiaries or parent companies, that could impact your tax obligations.
Schedule H – Current Earnings and Profits
Schedule H is for reporting current earnings and profits if you own a controlled foreign corporation (CFC) or calculating taxable income if you’re a U.S. person or a CFP (controlled foreign partnership). This data helps the IRS track income distribution and ensures accurate reporting of tax liability on your annual tax return.
Schedule I – Transferred Losses
If your FDE or FB is owned directly or indirectly by a domestic corporation, use Schedule I to report any transferred loss amounts. Note that you do not file Schedule I if your foreign branch or disregarded entity is owned by a CFC. Properly documenting transferred losses helps prevent non compliance and reduces penalties.
Schedule J – Foreign Income Taxes
All foreign income taxes paid or accrued by your disregarded entity are listed on Schedule J. These details may affect your foreign tax credits, helping avoid double taxation on your tax return—especially useful if you’re self-employed and dealing with self employment taxes in a foreign country. The annual accounting period for reporting foreign income taxes can either be a calendar year or a fiscal year.
Schedule M – Transactions with Related Entities
On Schedule M, report transactions between the FDE or FB and the filer, as well as other related entities. These transactions can influence your overall tax picture and must be disclosed accurately to respect U.S. reporting rules.
Filing the IRS Form 8858 is a critical tax requirement for US taxpayers who own foreign entities or operate foreign branches. Failure to comply with the regulations can result in significant penalties and other legal consequences. Due to the complexity of the form, it’s highly recommended to seek the assistance of a qualified tax professional. With our guidance and support, you can rest assured that your Form 8858 is completed accurately and all your tax requirements are met.
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By staying informed and meeting these deadlines, you can avoid penalties and keep your finances in good standing—no matter where you live!
