# US - form 5471



## Geo56

My spouse is about to start a business and wants me to play a role in it, so I'd probably be a director of 40% -ish of it.

I am trying to get my head around this from a US tax point of view, ie form 5471. From what I can see, I'd be in filer category 2.

My understanding of it is that I would, in fact, not complicate my tax situation at all because this business would not be a CFC because I would not be its owner, and constructive/indirect ownership would not apply since my spouse is a non-resident alien. Is this analysis correct? (Obviously I'd pay taxes as normal on any earnings/dividends from the business.)

Every website I have come across confirms this, but the instructions for form 5471 makes me nervous because it only lists the bit about NRA for filers in category 4/5, whereas as far as I understand, I'd be category 2.

Thanks for the help.


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## Bevdeforges

To some extent, it can depend on what type of business your spouse is planning on starting. If he is going to incorporate right from the start, it can depend on how big a business it is and exactly what form of incorporation he's using. Not all business forms are considered "corporations" under US tax rules - and frankly there is some controversy over whether a "private limited company" meets the definition, whereas a "public limited company" most certainly does.

This is where you have to interpret what you know of the tax regulations and stand by your interpretation.
Cheers,
Bev


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## Geo56

Thanks for the reply!

What are the alternative interpretations, and how would those impact on my tax situation? He'll be providing services to companies, similar to what he's done in the past as an employee but now as a company, and it's incorporated from the start. It's certainly a private company, not public. It'll never be a massive company as he'll be its main employee with me only possibly doing small bits and bobs (probably the admin side of things), and it'll never go beyond that. Would these facts make my life easier, or harder? If a private company doesn't meet the corporation label, does that mean that form 5471/other similar forms are most certainly out of the picture and I only file the income that I make out of this, and me being a director is totally irrelevant anyway? We don't need to add my name to the company, if it's going to complicate things.


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## Bevdeforges

That's certainly how I have done things for the last 20 years. As a private limited company, you're not actually a CFC because you're not actually a "corporation" in the eyes of the IRS. As long as you are an employee of the company and pay in your social insurances like an employee (even on a minimal salary), you can just report your salary as salary (and use the FEIE if you like), and forget about all those other forms.

You should, of course, report the company bank accounts on your FBAR if you have signature authority over the accounts - however for employer accounts, you just list the name and address of the employer and none of the bank or account detail.
Cheers,
Bev


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## Geo56

Thank you!

To avoid FBAR issues, I have asked my spouse to keep me well away from any bank accounts, so hopefully that avoids that issue altogether. I have worked very hard to keep my tax situation as simple as possible each year, so don't want to make anything tougher!

The rest sounds good. As a private company, then, the only thing I'd need to report is the income/dividends as normal. But can you confirm for me: even if the IRS considered it to be a CFC, because it is owned (more than 50%) by my spouse who is an NRA, I can't have constructive ownership of it, correct? As I mentioned, my concern was that despite all websites I found agreeing with this, in the instructions it only mentions it in relations to other categories of filers, whereas I think I'd be category 2 where that has no mention (cat 2 being for directors).

Thanks again!


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## Bevdeforges

Actually, it's supposed to be if you (as the American person) owns more than 10% I think it is (though it may have changed recently). But the fact of it being a type of business that is not on the list of foreign business forms in the UK considered "corporations" is what you're relying on. It would also help a whole lot if your share in the business keeps your total foreign holdings under the $200,000 mark that is when FATCA kicks in. (Sometimes it's an advantage to be poor... <g>)
Cheers,
Bev


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## Geo56

Yeah - it is 10%, but what I am hoping to rely on (even if the corporation thing didn't work) is that a corporation only becomes a CFC if it is owned (ie 50.1%+) by Americans/American interests. So as long as I don't own more than 50%, either directly or indirectly, it doesn't have to be reported in any way at all! As long as you can't indirectly own the part of an NRA spouse.

I want to phone the IRS to double check, but phoning them always scares me - ha.

I hadn't thought about the FATCA aspect though. I don't really get how you'd measure the worth of my shares. I own 40%, ok, but 40% of what exactly? The total income each year would go toward hitting the 200k fatca limit, even if I am only taking a tiny part of that (as income)? (ie is it 40% of the yearly profit, or what?) I can't say I really get how that part works.

To keep both his life and my life simple, maybe I should just avoid any connection to the business at all. :/

I understand that dividends can't be excluded. Can I earn much in that before I am taxed in the US?


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## Geo56

I found it in IRS guidance:



> Stock owned by a non-resident alien individual is not treated as
> owned by a U.S. person.
> 
> A, B, C, and D are U.S. persons. A and B are married and each
> own 25% of foreign Corporation X. Additionally, C, their daughter,
> and D, C’s daughter, each own 25% of Corporation X. A and B
> are each considered to own 100% of Corporation X because they
> are attributed each other’s stock, as well as the stock owned by C
> (their daughter) and D (their granddaughter).
> C also constructively owns 100% of Corporation X, because she is
> attributed her parents’ and daughter’s stock. D constructively
> owns 50% (only her own and her mother’s stock).
> If D was a non resident alien, A, B, and C would only
> constructively own 75% of Corporation X because stock of a nonresident
> alien is not considered to be owned by a U.S. person.


I still don't really get the fatca aspect though!


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## Bevdeforges

As far as your ownership interest is concerned, you count only the balance sheet value of the business. (The income you declare each year.) But for a business you have a "capital" account, which is your investment in the business. If the business is worth $100,000 then a 40% ownership interest is worth $40,000.

Many business start out with ownership capital of much, much less than $100,000. It's that valuation that you use for the FATCA forms and declarations.
Cheers,
Bev


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## Geo56

Since it is a business in providing services, I don't see where anything is being invested, originally anyway. No capital is being used to start the business. Services will be provided and money will be paid for those services, so 40% in this case would be 40% of, effectively, what my spouse earns on a yearly basis...correct? Sorry - I appear to manage the more intricate tax bits but am failing on the more basic company bits, haha.

If this is the case, then it'll not come anywhere close to 200k, but on the same token I don't want to risk it ever doing so since it would combine with my savings and anything else I have going on too...so I think I might just tell him to keep me out altogether to keep my life a bit more stress-free.


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## Bevdeforges

Any business has both an income statement and a balance sheet. The balance sheet lists the "durable" stuff - like bank accounts, receivables, payables and such. Very simply speaking, the assets of the business (which include stuff like accounts receivable, office supplies, bank balances, etc.) less the liabilities (payables, any debts incurred, what is owed to the tax and payroll tax authorities) is the "capital." 

Granted, in a consultancy, the capital is probably pretty minimal. And that's why you shouldn't get too concerned (at least at the start) about complicating your life or your tax situation. (Having you on the payroll is also a good way to take money out of the company as income and to build your insurance record for retirement and health coverage.)

Don't get caught up in all the paperwork. Until and unless your husband's consultancy becomes a mini-empire (with employees, offices, branches and whatever) chances are you can treat it pretty much like a regular job.
Cheers,
Bev


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## Geo56

Ok - so if I add myself as a 40% director, I'll be able to report it as purely employee earnings etc up until I hit fatca levels of 200k. If that were to ever happen, I suppose I can predict it the year before and then remove myself completely from the company to keep myself and my taxes simple, correct?


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## Bevdeforges

Your employee earnings have nothing to do with the FATCA 200K threshold. If you set yourself up as 40% owner of the company, you can pay yourself whatever you want to. Your ownership interest is worth whatever you initially paid into the company to get it off the ground. As the company makes profits, the profits are added to the capital of the company (unless paid out in dividends) - but your salary has been subtracted already as an expense of the company.

You might want to talk to whatever accountant your husband is planning on using for the company. She or he can probably explain the balance sheet to you better than I can here on the forum.
Cheers,
Bev


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