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Help Filing 1040x

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Help Filing 1040x

Help filing 1040x 5. Help filing 1040x   Business Income Table of Contents Introduction Kinds of IncomeBartering for Property or Services Real Estate Rents Personal Property Rents Interest and Dividend Income Canceled Debt Other Income Items That Are Not IncomeAmount you can exclude. Help filing 1040x Short-term lease. Help filing 1040x Retail space. Help filing 1040x Qualified long-term real property. Help filing 1040x Guidelines for Selected Occupations Accounting for Your Income Introduction This chapter primarily explains business income and how to account for it on your tax return, what items are not considered income, and gives guidelines for selected occupations. Help filing 1040x If there is a connection between any income you receive and your business, the income is business income. Help filing 1040x A connection exists if it is clear that the payment of income would not have been made if you did not have the business. Help filing 1040x You can have business income even if you are not involved in the activity on a regular full-time basis. Help filing 1040x Income from work you do on the side in addition to your regular job can be business income. Help filing 1040x You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. Help filing 1040x But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C or C-EZ. Help filing 1040x For information on selling business assets, see chapter 3. Help filing 1040x Nonemployee compensation. Help filing 1040x Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. Help filing 1040x This includes amounts reported as nonemployee compensation in box 7 of the form. Help filing 1040x You can find more information in the instructions on the back of the Form 1099-MISC you received. Help filing 1040x Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. Help filing 1040x In most cases, your business income will be in the form of cash, checks, and credit card charges. Help filing 1040x But business income can be in other forms, such as property or services. Help filing 1040x These and other types of income are explained next. Help filing 1040x If you are a U. Help filing 1040x S. Help filing 1040x citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U. Help filing 1040x S. Help filing 1040x law. Help filing 1040x If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. Help filing 1040x For details, see Publication 54, Tax Guide for U. Help filing 1040x S. Help filing 1040x Citizens and Resident Aliens Abroad. Help filing 1040x Bartering for Property or Services Bartering is an exchange of property or services. Help filing 1040x You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. Help filing 1040x If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise. Help filing 1040x Example 1. Help filing 1040x You are a self-employed lawyer. Help filing 1040x You perform legal services for a client, a small corporation. Help filing 1040x In payment for your services, you receive shares of stock in the corporation. Help filing 1040x You must include the fair market value of the shares in income. Help filing 1040x Example 2. Help filing 1040x You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. Help filing 1040x You must include the fair rental value of the apartment in your gross receipts. Help filing 1040x Your landlord must include the fair market value of the work of art in his or her rental income. Help filing 1040x Example 3. Help filing 1040x You are a self-employed accountant. Help filing 1040x Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. Help filing 1040x Members get in touch with other members directly and bargain for the value of the services to be performed. Help filing 1040x In return for accounting services you provided for the house painter's business, the house painter painted your home. Help filing 1040x You must include in gross receipts the fair market value of the services you received from the house painter. Help filing 1040x The house painter must include the fair market value of your accounting services in his or her gross receipts. Help filing 1040x Example 4. Help filing 1040x You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. Help filing 1040x As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. Help filing 1040x You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account. Help filing 1040x The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. Help filing 1040x It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. Help filing 1040x See Publication 15 (Circular E), Employer's Tax Guide. Help filing 1040x Example 5. Help filing 1040x You operate a plumbing business and use the cash method of accounting. Help filing 1040x You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Help filing 1040x Each member has access to a directory that lists the members of the club and the services available. Help filing 1040x Members contact each other directly and request services to be performed. Help filing 1040x You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. Help filing 1040x You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members. Help filing 1040x Information returns. Help filing 1040x   If you are involved in a bartering transaction, you may have to file either of the following forms. Help filing 1040x Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Help filing 1040x Form 1099-MISC, Miscellaneous Income. Help filing 1040x For information about these forms, see the General Instructions for Certain Information Returns. Help filing 1040x Real Estate Rents If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. Help filing 1040x , who provides services (maid services, etc. Help filing 1040x ) for guests, report the rental income and expenses on Schedule C or C-EZ. Help filing 1040x If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. Help filing 1040x For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Help filing 1040x Real estate dealer. Help filing 1040x   You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Help filing 1040x Rent you receive from real estate held for sale to customers is subject to SE tax. Help filing 1040x However, rent you receive from real estate held for speculation or investment is not subject to SE tax. Help filing 1040x Trailer park owner. Help filing 1040x   Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. Help filing 1040x    You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and normally are not provided to maintain the lots in a condition for occupancy. Help filing 1040x Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. Help filing 1040x   Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers. Help filing 1040x   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. Help filing 1040x Hotels, boarding houses, and apartments. Help filing 1040x   Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. Help filing 1040x   Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. Help filing 1040x An example of a service that is not normally provided for the convenience of the occupants is maid service. Help filing 1040x However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. Help filing 1040x Prepaid rent. Help filing 1040x   Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. Help filing 1040x This is true no matter what accounting method or period you use. Help filing 1040x Lease bonus. Help filing 1040x   A bonus you receive from a lessee for granting a lease is an addition to the rent. Help filing 1040x Include it in your gross receipts in the year received. Help filing 1040x Lease cancellation payments. Help filing 1040x   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. Help filing 1040x Payments to third parties. Help filing 1040x   If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. Help filing 1040x A common example of this kind of income is a lessee's payment of your property taxes on leased real property. Help filing 1040x Settlement payments. Help filing 1040x   Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee. Help filing 1040x Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. Help filing 1040x ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. Help filing 1040x Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. Help filing 1040x If you receive any of those payments, include them in your gross receipts as explained in that discussion. Help filing 1040x Interest and Dividend Income Interest and dividends may be considered business income. Help filing 1040x Interest. Help filing 1040x   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Help filing 1040x Interest received on loans is business income if you are in the business of lending money. Help filing 1040x Uncollectible loans. Help filing 1040x   If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. Help filing 1040x If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. Help filing 1040x See Bad Debts in chapter 8. Help filing 1040x Unstated interest. Help filing 1040x   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. Help filing 1040x See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Help filing 1040x Dividends. Help filing 1040x   Generally, dividends are business income to dealers in securities. Help filing 1040x For most sole proprietors and statutory employees, however, dividends are nonbusiness income. Help filing 1040x If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. Help filing 1040x   If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. Help filing 1040x To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. Help filing 1040x Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. Help filing 1040x General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Help filing 1040x Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. Help filing 1040x If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. Help filing 1040x Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Help filing 1040x Price reduced after purchase. Help filing 1040x   If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. Help filing 1040x Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. Help filing 1040x Deductible debt. Help filing 1040x   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. Help filing 1040x Example. Help filing 1040x You get accounting services for your business on credit. Help filing 1040x Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Help filing 1040x Your accountant forgives part of the amount you owe for the accounting services. Help filing 1040x How you treat the canceled debt depends on your method of accounting. Help filing 1040x Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Help filing 1040x Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Help filing 1040x   For information on the cash and accrual methods of accounting, see chapter 2. Help filing 1040x Exclusions Do not include canceled debt in income in the following situations. Help filing 1040x However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Help filing 1040x For more information, see Form 982. Help filing 1040x The cancellation takes place in a bankruptcy case under title 11 of the U. Help filing 1040x S. Help filing 1040x Code (relating to bankruptcy). Help filing 1040x See Publication 908, Bankruptcy Tax Guide. Help filing 1040x The cancellation takes place when you are insolvent. Help filing 1040x You can exclude the canceled debt to the extent you are insolvent. Help filing 1040x See Publication 908. Help filing 1040x The canceled debt is a qualified farm debt owed to a qualified person. Help filing 1040x See chapter 3 in Publication 225, Farmer's Tax Guide. Help filing 1040x The canceled debt is a qualified real property business debt. Help filing 1040x This situation is explained later. Help filing 1040x The canceled debt is qualified principal residence indebtedness which is discharged after 2006. Help filing 1040x See Form 982. Help filing 1040x If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. Help filing 1040x If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. Help filing 1040x Debt. Help filing 1040x   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. Help filing 1040x Qualified real property business debt. Help filing 1040x   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. Help filing 1040x If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Help filing 1040x Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. Help filing 1040x However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. Help filing 1040x Cancellation of qualified real property business debt. Help filing 1040x   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. Help filing 1040x It was incurred or assumed in connection with real property used in a trade or business. Help filing 1040x It was secured by such real property. Help filing 1040x It was incurred or assumed at either of the following times. Help filing 1040x Before January 1, 1993. Help filing 1040x After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. Help filing 1040x It is debt to which you choose to apply these rules. Help filing 1040x   Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced. Help filing 1040x   You cannot exclude more than either of the following amounts. Help filing 1040x The excess (if any) of: The outstanding principal of qualified real property business debt (immediately before the cancellation), over The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation. Help filing 1040x The total adjusted bases of depreciable real property held by you immediately before the cancellation. Help filing 1040x These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Help filing 1040x Do not take into account depreciable real property acquired in contemplation of the cancellation. Help filing 1040x Election. Help filing 1040x   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. Help filing 1040x You must file your return by the due date (including extensions). Help filing 1040x If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Help filing 1040x For more information, see When To File in the form instructions. Help filing 1040x Other Income The following discussion explains how to treat other types of business income you may receive. Help filing 1040x Restricted property. Help filing 1040x   Restricted property is property that has certain restrictions that affect its value. Help filing 1040x If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C or C-EZ when the restriction is lifted. Help filing 1040x However, you can choose to be taxed in the year you receive the property. Help filing 1040x For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. Help filing 1040x Gains and losses. Help filing 1040x   Do not report on Schedule C or C-EZ a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Help filing 1040x Instead, you must report these gains and losses on other forms. Help filing 1040x For more information, see chapter 3. Help filing 1040x Promissory notes. Help filing 1040x   Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C or C-EZ. Help filing 1040x In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. Help filing 1040x Lost income payments. Help filing 1040x   If you reduce or stop your business activities, report on Schedule C or C-EZ any payment you receive for the lost income of your business from insurance or other sources. Help filing 1040x Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. Help filing 1040x Damages. Help filing 1040x   You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. Help filing 1040x Patent infringement. Help filing 1040x Breach of contract or fiduciary duty. Help filing 1040x Antitrust injury. Help filing 1040x Economic injury. Help filing 1040x   You may be entitled to a deduction against the income if it compensates you for actual economic injury. Help filing 1040x Your deduction is the smaller of the following amounts. Help filing 1040x The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount. Help filing 1040x Your loss from the injury that you have not yet deducted. Help filing 1040x Punitive damages. Help filing 1040x   You must also include punitive damages in income. Help filing 1040x Kickbacks. Help filing 1040x   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. Help filing 1040x However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold. Help filing 1040x Recovery of items previously deducted. Help filing 1040x   If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C or C-EZ. Help filing 1040x However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. Help filing 1040x If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. Help filing 1040x Example. Help filing 1040x Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. Help filing 1040x He also had 2 personal exemptions for a total of $7,800. Help filing 1040x He would not pay income tax even if he did not deduct the bad debt. Help filing 1040x Therefore, he will not report as income any part of the $300 he may recover in any future year. Help filing 1040x Exception for depreciation. Help filing 1040x   This rule does not apply to depreciation. Help filing 1040x You recover depreciation using the rules explained next. Help filing 1040x Recapture of depreciation. Help filing 1040x   In the following situations, you have to recapture the depreciation deduction. Help filing 1040x This means you include in income part or all of the depreciation you deducted in previous years. Help filing 1040x Listed property. Help filing 1040x   If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. Help filing 1040x You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Help filing 1040x Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. Help filing 1040x For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. Help filing 1040x That chapter explains how to determine whether property is used more than 50% in your business. Help filing 1040x Section 179 property. Help filing 1040x   If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. Help filing 1040x You do this by including in income on Schedule C part of the deduction you took. Help filing 1040x Use Part IV of Form 4797 to figure the amount to include on Schedule C. Help filing 1040x See chapter 2 in Publication 946 to find out when you recapture the deduction. Help filing 1040x Sale or exchange of depreciable property. Help filing 1040x   If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. Help filing 1040x You figure the income due to depreciation recapture in Part III of Form 4797. Help filing 1040x For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. Help filing 1040x Items That Are Not Income In some cases the property or money you receive is not income. Help filing 1040x Appreciation. Help filing 1040x   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. Help filing 1040x Consignments. Help filing 1040x   Consignments of merchandise to others to sell for you are not sales. Help filing 1040x The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Help filing 1040x Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Help filing 1040x Merchandise you have shipped out on consignment is included in your inventory until it is sold. Help filing 1040x   Do not include merchandise you receive on consignment in your inventory. Help filing 1040x Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use. Help filing 1040x Construction allowances. Help filing 1040x   If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions. Help filing 1040x Under a short-term lease of retail space. Help filing 1040x For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Help filing 1040x Amount you can exclude. Help filing 1040x   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Help filing 1040x Short-term lease. Help filing 1040x   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. Help filing 1040x The following rules apply in determining whether the lease is for 15 years or less. Help filing 1040x Take into account options to renew when figuring whether the lease is for 15 years or less. Help filing 1040x But do not take into account any option to renew at fair market value determined at the time of renewal. Help filing 1040x Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease. Help filing 1040x Retail space. Help filing 1040x   Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public. Help filing 1040x Qualified long-term real property. Help filing 1040x   Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends. Help filing 1040x Exchange of like-kind property. Help filing 1040x   If you exchange your business property or property you hold for investment solely for property of a like kind to be used in your business or to be held for investment, no gain or loss is recognized. Help filing 1040x This means that the gain is not taxable and the loss is not deductible. Help filing 1040x A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. Help filing 1040x For more information, see Form 8824. Help filing 1040x Leasehold improvements. Help filing 1040x   If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. Help filing 1040x However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. Help filing 1040x Loans. Help filing 1040x   Money borrowed through a bona fide loan is not income. Help filing 1040x Sales tax. Help filing 1040x   State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. Help filing 1040x Guidelines for Selected Occupations This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040) or C-EZ (Form 1040). Help filing 1040x Direct seller. Help filing 1040x   You must report all income you receive as a direct seller on Schedule C or C-EZ. Help filing 1040x This includes any of the following. Help filing 1040x Income from sales—payments you receive from customers for products they buy from you. Help filing 1040x Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. Help filing 1040x Prizes, awards, and gifts you receive from your selling business. Help filing 1040x You must report this income regardless of whether it is reported to you on an information return. Help filing 1040x   You are a direct seller if you meet all the following conditions. Help filing 1040x You are engaged in one of the following trades or businesses. Help filing 1040x Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment. Help filing 1040x Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). Help filing 1040x Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked. Help filing 1040x Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes. Help filing 1040x Executor or administrator. Help filing 1040x   If you administer a deceased person's estate, your fees are reported on Schedule C or C-EZ if you are one of the following: A professional fiduciary. Help filing 1040x A nonprofessional fiduciary (personal representative) and both of the following apply. Help filing 1040x The estate includes an active trade or business in which you actively participate. Help filing 1040x Your fees are related to the operation of that trade or business. Help filing 1040x A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business. Help filing 1040x    If the fees do not meet the above requirements, report them on line 21 of Form 1040. Help filing 1040x Fishing crew member. Help filing 1040x    If you are a member of the crew that catches fish or other water life, your earnings are reported on Schedule C or C-EZ if you meet all the requirements shown in chapter 10 under Fishing crew member . Help filing 1040x Insurance agent, former. Help filing 1040x   Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C or C-EZ if all the following conditions are met. Help filing 1040x You received payments after your agreement to perform services for the company ended. Help filing 1040x You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment. Help filing 1040x You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended. Help filing 1040x The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both. Help filing 1040x The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service). Help filing 1040x Insurance agent, retired. Help filing 1040x   Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. Help filing 1040x Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. Help filing 1040x   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. Help filing 1040x Newspaper carrier or distributor. Help filing 1040x   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Help filing 1040x You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). Help filing 1040x Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. Help filing 1040x You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Help filing 1040x   This rule applies whether or not you hire others to help you make deliveries. Help filing 1040x It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. Help filing 1040x Newspaper or magazine vendor. Help filing 1040x   If you are 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Help filing 1040x You sell newspapers or magazines to ultimate consumers. Help filing 1040x You sell them at a fixed price. Help filing 1040x Your earnings are based on the difference between the sales price and your cost of goods sold. Help filing 1040x   This rule applies whether or not you are guaranteed a minimum amount of earnings. Help filing 1040x It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. Help filing 1040x Notary public. Help filing 1040x   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. Help filing 1040x These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). Help filing 1040x Public official. Help filing 1040x   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. Help filing 1040x This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Help filing 1040x Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these. Help filing 1040x   Public officials of state or local governments report their fees on Schedule C or C-EZ if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement. Help filing 1040x Real estate agent or direct seller. Help filing 1040x   If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C or C-EZ if both the following apply. Help filing 1040x Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work. Help filing 1040x You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Help filing 1040x Securities dealer. Help filing 1040x   If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C or C-EZ. Help filing 1040x For more information, see sections 1256 and 1402(i). Help filing 1040x Securities trader. Help filing 1040x   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. Help filing 1040x As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. Help filing 1040x However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. Help filing 1040x For more information about securities traders, see Publication 550, Investment Income and Expenses. Help filing 1040x Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. Help filing 1040x This section discusses some of the more common differences that may affect business transactions. Help filing 1040x Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). Help filing 1040x If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. Help filing 1040x Dealers in real estate are not allowed to use inventories. Help filing 1040x For more information on inventories, see chapter 2. Help filing 1040x Income paid to a third party. Help filing 1040x   All income you earn is taxable to you. Help filing 1040x You cannot avoid tax by having the income paid to a third party. Help filing 1040x Example. Help filing 1040x You rent out your property and the rental agreement directs the lessee to pay the rent to your son. Help filing 1040x The amount paid to your son is gross income to you. Help filing 1040x Cash discounts. Help filing 1040x   These are amounts the seller permits you to deduct from the invoice price for prompt payment. Help filing 1040x For income tax purposes, you can use either of the following two methods to account for cash discounts. Help filing 1040x Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). Help filing 1040x Credit the cash discount to a discount income account. Help filing 1040x You must use the chosen method every year for all your purchase discounts. Help filing 1040x   If you use the second method, the credit balance in the account at the end of your tax year is business income. Help filing 1040x Under this method, you do not reduce the cost of goods sold by the cash discounts you received. Help filing 1040x When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise. Help filing 1040x Trade discounts. Help filing 1040x   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. Help filing 1040x Do not enter these discounts on your books of account. Help filing 1040x Instead, use only the net amount as the cost of the merchandise purchased. Help filing 1040x For more information, see Trade discounts in chapter 6. Help filing 1040x Payment placed in escrow. Help filing 1040x   If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. Help filing 1040x However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year. Help filing 1040x Sales returns and allowances. Help filing 1040x   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. Help filing 1040x Advance payments. Help filing 1040x   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. Help filing 1040x Insurance proceeds. Help filing 1040x   If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. Help filing 1040x You cannot deduct the reimbursed part of a casualty or theft loss. Help filing 1040x   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. Help filing 1040x Prev  Up  Next   Home   More Online Publications
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The Help Filing 1040x

Help filing 1040x Publication 515 - Main Content Table of Contents Withholding of TaxWithholding Agent Withholding and Reporting Obligations Persons Subject to NRA WithholdingIdentifying the Payee Foreign Persons DocumentationBeneficial Owners Foreign Intermediaries and Foreign Flow-Through Entities Standards of Knowledge Presumption Rules Income Subject to NRA WithholdingSource of Income Fixed or Determinable Annual or Periodical Income (FDAP) Withholding on Specific IncomeEffectively Connected Income Income Not Effectively Connected Pay for Personal Services Performed Artists and Athletes (Income Codes 42 and 43) Other Income Foreign Governments and Certain Other Foreign Organizations U. Help filing 1040x S. Help filing 1040x Taxpayer Identification NumbersUnexpected payment. Help filing 1040x Depositing Withheld TaxesWhen Deposits Are Required Adjustment for Overwithholding Returns RequiredJoint owners. Help filing 1040x Electronic reporting. Help filing 1040x Partnership Withholding on Effectively Connected IncomeWho Must Withhold Foreign Partner Publicly Traded Partnerships U. Help filing 1040x S. Help filing 1040x Real Property InterestForeign corporations. Help filing 1040x Domestic corporations. Help filing 1040x U. Help filing 1040x S. Help filing 1040x real property holding corporations. Help filing 1040x Partnerships. Help filing 1040x Trusts and estates. Help filing 1040x Domestically controlled QIE. Help filing 1040x Late filing of certifications or notices. Help filing 1040x Certifications. Help filing 1040x Liability of agent or qualified substitute. Help filing 1040x Reporting and Paying the Tax Withholding Certificates Tax Treaty TablesTable 1 Table 2 Table 3 How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Help filing 1040x Withholding of Tax In most cases, a foreign person is subject to U. Help filing 1040x S. Help filing 1040x tax on its U. Help filing 1040x S. Help filing 1040x source income. Help filing 1040x Most types of U. Help filing 1040x S. Help filing 1040x source income received by a foreign person are subject to U. Help filing 1040x S. Help filing 1040x tax of 30%. Help filing 1040x A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. Help filing 1040x The tax is generally withheld (NRA withholding) from the payment made to the foreign person. Help filing 1040x The term “NRA withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Help filing 1040x In most cases, NRA withholding describes the withholding regime that requires withholding on a payment of U. Help filing 1040x S. Help filing 1040x source income. Help filing 1040x Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to NRA withholding. Help filing 1040x NRA withholding does not include withholding under section 1445 of the Code (see U. Help filing 1040x S. Help filing 1040x Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income , later). Help filing 1040x A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. Help filing 1040x However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U. Help filing 1040x S. Help filing 1040x person is not required to withhold. Help filing 1040x In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Help filing 1040x Withholding Agent You are a withholding agent if you are a U. Help filing 1040x S. Help filing 1040x or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. Help filing 1040x A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U. Help filing 1040x S. Help filing 1040x branch of certain foreign banks and insurance companies. Help filing 1040x You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment. Help filing 1040x Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Help filing 1040x In most cases, the U. Help filing 1040x S. Help filing 1040x person who pays an amount subject to NRA withholding is the person responsible for withholding. Help filing 1040x However, other persons may be required to withhold. Help filing 1040x For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. Help filing 1040x In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later. Help filing 1040x Liability for tax. Help filing 1040x   As a withholding agent, you are personally liable for any tax required to be withheld. Help filing 1040x This liability is independent of the tax liability of the foreign person to whom the payment is made. Help filing 1040x If you fail to withhold and the foreign payee fails to satisfy its U. Help filing 1040x S. Help filing 1040x tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties. Help filing 1040x   The applicable tax will be collected only once. Help filing 1040x If the foreign person satisfies its U. Help filing 1040x S. Help filing 1040x tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold. Help filing 1040x Determination of amount to withhold. Help filing 1040x   You must withhold on the gross amount subject to NRA withholding. Help filing 1040x You cannot reduce the gross amount by any deductions. Help filing 1040x However, see Scholarships and Fellowship Grants and Pay for Personal Services Performed , later, for when a deduction for a personal exemption may be allowed. Help filing 1040x   If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. Help filing 1040x In no case, however, should you withhold more than 30% of the total amount paid. Help filing 1040x Or, you may make a reasonable estimate of the amount from U. Help filing 1040x S. Help filing 1040x sources and put a corresponding part of the amount due in escrow until the amount from U. Help filing 1040x S. Help filing 1040x sources can be determined, at which time withholding becomes due. Help filing 1040x When to withhold. Help filing 1040x   Withholding is required at the time you make a payment of an amount subject to withholding. Help filing 1040x A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. Help filing 1040x A payment is considered made to a person if it is paid for that person's benefit. Help filing 1040x For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. Help filing 1040x A payment also is considered made to a person if it is made to that person's agent. Help filing 1040x   A U. Help filing 1040x S. Help filing 1040x partnership should withhold when any distributions that include amounts subject to withholding are made. Help filing 1040x However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U. Help filing 1040x S. Help filing 1040x partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. Help filing 1040x If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income , later. Help filing 1040x A U. Help filing 1040x S. Help filing 1040x trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. Help filing 1040x To the extent a U. Help filing 1040x S. Help filing 1040x trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S. Help filing 1040x Withholding and Reporting Obligations You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. Help filing 1040x (See Returns Required , later. Help filing 1040x ) An exception from reporting may apply to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business. Help filing 1040x Form 1099 reporting and backup withholding. Help filing 1040x    You also may be responsible as a payer for reporting on Form 1099 payments made to a U. Help filing 1040x S. Help filing 1040x person. Help filing 1040x You must withhold 28% (backup withholding rate) from a reportable payment made to a U. Help filing 1040x S. Help filing 1040x person that is subject to Form 1099 reporting if any of the following apply. Help filing 1040x The U. Help filing 1040x S. Help filing 1040x person has not provided its taxpayer identification number (TIN) in the manner required. Help filing 1040x The IRS notifies you that the TIN furnished by the payee is incorrect. Help filing 1040x There has been a notified payee underreporting. Help filing 1040x There has been a payee certification failure. Help filing 1040x In most cases, a TIN must be provided by a U. Help filing 1040x S. Help filing 1040x non-exempt recipient on Form W-9, Request for Taxpayer Identification Number and Certification. Help filing 1040x A payer files a tax return on Form 945, Annual Return of Withheld Federal Income Tax, for backup withholding. Help filing 1040x You may be required to file Form 1099 and, if appropriate, backup withhold, even if you do not make the payments directly to that U. Help filing 1040x S. Help filing 1040x person. Help filing 1040x For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U. Help filing 1040x S. Help filing 1040x person subject to Form 1099 reporting. Help filing 1040x See Identifying the Payee , later, for more information. Help filing 1040x Also see Section S. Help filing 1040x Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Certain Information Returns. Help filing 1040x Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting. Help filing 1040x Wages paid to employees. Help filing 1040x   If you are the employer of a nonresident alien, you generally must withhold taxes at graduated rates. Help filing 1040x See Pay for Personal Services Performed , later. Help filing 1040x Effectively connected income by partnerships. Help filing 1040x   A withholding agent that is a partnership (whether U. Help filing 1040x S. Help filing 1040x or foreign) is also responsible for withholding on its income effectively connected with a U. Help filing 1040x S. Help filing 1040x trade or business that is allocable to foreign partners. Help filing 1040x See Partnership Withholding on Effectively Connected Income , later, for more information. Help filing 1040x U. Help filing 1040x S. Help filing 1040x real property interest. Help filing 1040x   A withholding agent also may be responsible for withholding if a foreign person transfers a U. Help filing 1040x S. Help filing 1040x real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U. Help filing 1040x S. Help filing 1040x real property interest to a shareholder, partner, or beneficiary that is a foreign person. Help filing 1040x See U. Help filing 1040x S. Help filing 1040x Real Property Interest , later. Help filing 1040x Persons Subject to NRA Withholding NRA withholding applies only to payments made to a payee that is a foreign person. Help filing 1040x It does not apply to payments made to U. Help filing 1040x S. Help filing 1040x persons. Help filing 1040x Usually, you determine the payee's status as a U. Help filing 1040x S. Help filing 1040x or foreign person based on the documentation that person provides. Help filing 1040x See Documentation , later. Help filing 1040x However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation, then you must apply certain presumption rules, discussed later. Help filing 1040x Identifying the Payee In most cases, the payee is the person to whom you make the payment, regardless of whether that person is the beneficial owner of the income. Help filing 1040x However, there are situations in which the payee is a person other than the one to whom you actually make a payment. Help filing 1040x U. Help filing 1040x S. Help filing 1040x agent of foreign person. Help filing 1040x   If you make a payment to a U. Help filing 1040x S. Help filing 1040x person and you have actual knowledge that the U. Help filing 1040x S. Help filing 1040x person is receiving the payment as an agent of a foreign person, you must treat the payment as made to the foreign person. Help filing 1040x However, if the U. Help filing 1040x S. Help filing 1040x person is a financial institution, you may treat the institution as the payee provided you have no reason to believe that the institution will not comply with its own obligation to withhold. Help filing 1040x   If the payment is not subject to NRA withholding (for example, gross proceeds from the sales of securities), you must treat the payment as made to a U. Help filing 1040x S. Help filing 1040x person and not as a payment to a foreign person. Help filing 1040x You may be required to report the payment on Form 1099 and, if applicable, backup withhold. Help filing 1040x Disregarded entities. Help filing 1040x   A business entity that is not a corporation and that has a single owner may be disregarded as an entity separate from its owner (a disregarded entity) for federal tax purposes. Help filing 1040x The payee of a payment made to a disregarded entity is the owner of the entity. Help filing 1040x   If the owner of the entity is a foreign person, you must apply NRA withholding unless you can treat the foreign owner as a beneficial owner entitled to a reduced rate of withholding. Help filing 1040x   If the owner is a U. Help filing 1040x S. Help filing 1040x person, you do not apply NRA withholding. Help filing 1040x However, you may be required to report the payment on Form 1099 and, if applicable, backup withhold. Help filing 1040x You may assume that a foreign entity is not a disregarded entity unless you can reliably associate the payment with documentation provided by the owner or you have actual knowledge or reason to know that the foreign entity is a disregarded entity. Help filing 1040x Flow-Through Entities The payees of payments (other than income effectively connected with a U. Help filing 1040x S. Help filing 1040x trade or business) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. Help filing 1040x This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Help filing 1040x Income that is, or is deemed to be, effectively connected with the conduct of a U. Help filing 1040x S. Help filing 1040x trade or business of a flow-through entity is treated as paid to the entity. Help filing 1040x All of the following are flow-through entities. Help filing 1040x A foreign partnership (other than a withholding foreign partnership). Help filing 1040x A foreign simple or foreign grantor trust (other than a withholding foreign trust). Help filing 1040x A fiscally transparent entity receiving income for which treaty benefits are claimed. Help filing 1040x See Fiscally transparent entity , later. Help filing 1040x In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation , later) on which it claims such status. Help filing 1040x You also may be required to treat the entity as a flow-through entity under the presumption rules, discussed later. Help filing 1040x You must determine whether the owners or beneficiaries of a flow-through entity are U. Help filing 1040x S. Help filing 1040x or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of NRA withholding applies. Help filing 1040x You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. Help filing 1040x If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. Help filing 1040x See Documentation and Presumption Rules , later. Help filing 1040x Withholding foreign partnerships and withholding foreign trusts are not flow-through entities. Help filing 1040x Foreign partnerships. Help filing 1040x    A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. Help filing 1040x If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves a flow-through entity or a foreign intermediary. Help filing 1040x However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Help filing 1040x If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees. Help filing 1040x Example 1. Help filing 1040x A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation; and a U. Help filing 1040x S. Help filing 1040x citizen. Help filing 1040x You make a payment of U. Help filing 1040x S. Help filing 1040x source interest to the partnership. Help filing 1040x It gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien; Form W-8BEN from the foreign corporation; and Form W-9 from the U. Help filing 1040x S. Help filing 1040x citizen. Help filing 1040x The partnership also gives you a complete withholding statement that enables you to associate a part of the interest payment to each partner. Help filing 1040x You must treat all three partners as the payees of the interest payment as if the payment were made directly to them. Help filing 1040x Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S. Help filing 1040x Report the payment to the U. Help filing 1040x S. Help filing 1040x citizen on Form 1099-INT. Help filing 1040x Example 2. Help filing 1040x A nonwithholding foreign partnership has two partners: a foreign corporation and a nonwithholding foreign partnership. Help filing 1040x The second partnership has two partners, both nonresident alien individuals. Help filing 1040x You make a payment of U. Help filing 1040x S. Help filing 1040x source interest to the first partnership. Help filing 1040x It gives you a valid Form W-8IMY with which it associates a Form W-8BEN from the foreign corporation and a Form W-8IMY from the second partnership. Help filing 1040x In addition, Forms W-8BEN from the partners are associated with the Form W-8IMY from the second partnership. Help filing 1040x The Forms W-8IMY from the partnerships have complete withholding statements associated with them. Help filing 1040x Because you can reliably associate a part of the interest payment with the Form W-8BEN provided by the foreign corporation and the Forms W-8BEN provided by the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest. Help filing 1040x Example 3. Help filing 1040x You make a payment of U. Help filing 1040x S. Help filing 1040x source dividends to a withholding foreign partnership. Help filing 1040x The partnership has two partners, both foreign corporations. Help filing 1040x You can reliably associate the payment with a valid Form W-8IMY from the partnership on which it represents that it is a withholding foreign partnership. Help filing 1040x You must treat the partnership as the payee of the dividends. Help filing 1040x Foreign simple and grantor trust. Help filing 1040x   A trust is foreign unless it meets both of the following tests. Help filing 1040x A court within the United States is able to exercise primary supervision over the administration of the trust. Help filing 1040x One or more U. Help filing 1040x S. Help filing 1040x persons have the authority to control all substantial decisions of the trust. Help filing 1040x   In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. Help filing 1040x A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679 of the Code. Help filing 1040x   The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. Help filing 1040x The payees of a payment made to a foreign grantor trust are the owners of the trust. Help filing 1040x However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Help filing 1040x If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees. Help filing 1040x Example. Help filing 1040x A foreign simple trust has three beneficiaries: two nonresident alien individuals and a U. Help filing 1040x S. Help filing 1040x citizen. Help filing 1040x You make a payment of interest to the foreign trust. Help filing 1040x It gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident aliens and a Form W-9 from the U. Help filing 1040x S. Help filing 1040x citizen. Help filing 1040x The trust also gives you a complete withholding statement that enables you to associate a part of the interest payment with the forms provided by each beneficiary. Help filing 1040x You must treat all three beneficiaries as the payees of the interest payment as if the payment were made directly to them. Help filing 1040x Report the payment to the nonresident aliens on Forms 1042-S. Help filing 1040x Report the payment to the U. Help filing 1040x S. Help filing 1040x citizen on Form 1099-INT. Help filing 1040x Fiscally transparent entity. Help filing 1040x   If a reduced rate of withholding under an income tax treaty is claimed, a flow-through entity includes any entity in which the interest holder must treat the entity as fiscally transparent. Help filing 1040x The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc. Help filing 1040x ). Help filing 1040x The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. Help filing 1040x An entity is considered to be fiscally transparent for the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Help filing 1040x Subject to the standards of knowledge rules discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity. Help filing 1040x   The payees of a payment made to a fiscally transparent entity are the interest holders of the entity. Help filing 1040x Example. Help filing 1040x Entity A is a business organization organized under the laws of country X that has an income tax treaty in force with the United States. Help filing 1040x A has two interest holders, B and C. Help filing 1040x B is a corporation organized under the laws of country Y. Help filing 1040x C is a corporation organized under the laws of country Z. Help filing 1040x Both countries Y and Z have an income tax treaty in force with the United States. Help filing 1040x A receives royalty income from U. Help filing 1040x S. Help filing 1040x sources that is not effectively connected with the conduct of a trade or business in the United States. Help filing 1040x For U. Help filing 1040x S. Help filing 1040x income tax purposes, A is treated as a partnership. Help filing 1040x Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. Help filing 1040x The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income was realized directly from the source that paid it to A. Help filing 1040x Accordingly, A is fiscally transparent in its jurisdiction, country X. Help filing 1040x B and C are not fiscally transparent under the laws of their respective countries of incorporation. Help filing 1040x Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income was realized directly from the source that paid it to A. Help filing 1040x Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U. Help filing 1040x S. Help filing 1040x source royalty income for purposes of the U. Help filing 1040x S. Help filing 1040x -Y income tax treaty. Help filing 1040x Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. Help filing 1040x Therefore, A is not treated as fiscally transparent under the laws of country Z. Help filing 1040x Accordingly, C is not treated as deriving its share of the U. Help filing 1040x S. Help filing 1040x source royalty income for purposes of the U. Help filing 1040x S. Help filing 1040x -Z income tax treaty. Help filing 1040x Foreign Intermediaries In most cases, if you make payments to a foreign intermediary, the payees are the persons for whom the foreign intermediary collects the payment, such as account holders or customers, not the intermediary itself. Help filing 1040x This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Help filing 1040x You may, however, treat a qualified intermediary that has assumed primary withholding responsibility for a payment as the payee, and you are not required to withhold. Help filing 1040x An intermediary is a custodian, broker, nominee, or any other person that acts as an agent for another person. Help filing 1040x A foreign intermediary is either a qualified intermediary or a nonqualified intermediary. Help filing 1040x In most cases, you determine whether an entity is a qualified intermediary or a nonqualified intermediary based on the representations the intermediary makes on Form W-8IMY. Help filing 1040x You must determine whether the customers or account holders of a foreign intermediary are U. Help filing 1040x S. Help filing 1040x or foreign persons and, if the account holder or customer is foreign, whether a reduced rate of NRA withholding applies. Help filing 1040x You make these determinations based on the foreign intermediary's Form W-8IMY and associated information and documentation. Help filing 1040x If you do not have all of the information or documentation that is required to reliably associate a payment with a payee, you must apply the presumption rules. Help filing 1040x See Documentation and Presumption Rules , later. Help filing 1040x Nonqualified intermediary. Help filing 1040x   A nonqualified intermediary (NQI) is any intermediary that is a foreign person and that is not a qualified intermediary. Help filing 1040x The payees of a payment made to an NQI are the customers or account holders on whose behalf the NQI is acting. Help filing 1040x Example. Help filing 1040x You make a payment of interest to a foreign bank that is a nonqualified intermediary. Help filing 1040x The bank gives you a Form W-8IMY and the Forms W-8BEN of two foreign persons, and a Form W-9 from a U. Help filing 1040x S. Help filing 1040x person for whom the bank is collecting the payments. Help filing 1040x The bank also associates with its Form W-8IMY a withholding statement on which it allocates the interest payment to each account holder and provides all other information required to be on the withholding statement. Help filing 1040x The account holders are the payees of the interest payment. Help filing 1040x You should report the part of the interest paid to the two foreign persons on Forms 1042-S and the part paid to the U. Help filing 1040x S. Help filing 1040x person on Form 1099-INT. Help filing 1040x Qualified intermediary. Help filing 1040x   A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U. Help filing 1040x S. Help filing 1040x intermediary) that has entered into a qualified intermediary withholding agreement (discussed later) with the IRS. Help filing 1040x You may treat a QI as a payee to the extent the QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. Help filing 1040x In this situation, the QI is required to withhold the tax. Help filing 1040x You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI. Help filing 1040x   A payment to a QI to the extent it does not assume primary NRA withholding responsibility is considered made to the person on whose behalf the QI acts. Help filing 1040x If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U. Help filing 1040x S. Help filing 1040x person. Help filing 1040x Branches of financial institutions. Help filing 1040x   Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved “know-your-customer” (KYC) rules. Help filing 1040x The countries with approved KYC rules are listed on IRS. Help filing 1040x gov. Help filing 1040x QI withholding agreement. Help filing 1040x   Foreign financial institutions and foreign branches of U. Help filing 1040x S. Help filing 1040x financial institutions can enter into an agreement with the IRS to be a qualified intermediary. Help filing 1040x   A QI is entitled to certain simplified withholding and reporting rules. Help filing 1040x In general, there are three major areas whereby intermediaries with QI status are afforded such simplified treatment. Help filing 1040x   To apply for QI status, complete Form 14345, Qualified Intermediary Application, and Form SS-4, Application for Employer Identification Number. Help filing 1040x These forms, and the procedures required to obtain a QI withholding agreement are available at www. Help filing 1040x irs. Help filing 1040x gov/Businesses/Corporations/Qualified-Intermediaries-(QI). Help filing 1040x Documentation. Help filing 1040x   A QI is not required to forward documentation obtained from foreign account holders to the U. Help filing 1040x S. Help filing 1040x withholding agent from whom the QI receives a payment of U. Help filing 1040x S. Help filing 1040x source income. Help filing 1040x The QI maintains such documentation at its location and provides the U. Help filing 1040x S. Help filing 1040x withholding agent with withholding rate pools. Help filing 1040x A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding. Help filing 1040x   A QI is required to provide the U. Help filing 1040x S. Help filing 1040x withholding agent with information regarding U. Help filing 1040x S. Help filing 1040x persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding. Help filing 1040x   If a QI obtains documentary evidence under the “know-your-customer” rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. Help filing 1040x This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence that is not of the type specified in the attachment to the agreement. Help filing 1040x Form 1042-S reporting. Help filing 1040x   A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. Help filing 1040x Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified intermediary or a flow-through entity (discussed earlier). Help filing 1040x Collective refund procedures. Help filing 1040x   A QI may seek a refund on behalf of its direct account holders. Help filing 1040x The direct account holders, therefore, are not required to file returns with the IRS to obtain refunds, but rather may obtain them from the QI. Help filing 1040x U. Help filing 1040x S. Help filing 1040x branches of foreign banks and foreign insurance companies. Help filing 1040x   Special rules apply to a U. Help filing 1040x S. Help filing 1040x branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. Help filing 1040x If you agree to treat the branch as a U. Help filing 1040x S. Help filing 1040x person, you may treat the branch as a U. Help filing 1040x S. Help filing 1040x payee for a payment subject to NRA withholding provided you receive a Form W-8IMY from the U. Help filing 1040x S. Help filing 1040x branch on which the agreement is evidenced. Help filing 1040x If you treat the branch as a U. Help filing 1040x S. Help filing 1040x payee, you are not required to withhold. Help filing 1040x Even though you agree to treat the branch as a U. Help filing 1040x S. Help filing 1040x person, you must report the payment on Form 1042-S. Help filing 1040x   A financial institution organized in a U. Help filing 1040x S. Help filing 1040x possession is treated as a U. Help filing 1040x S. Help filing 1040x branch. Help filing 1040x The special rules discussed in this section apply to a possessions financial institution. Help filing 1040x   If you are paying a U. Help filing 1040x S. Help filing 1040x branch an amount that is not subject to NRA withholding, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U. Help filing 1040x S. Help filing 1040x person for amounts subject to NRA withholding. Help filing 1040x Consequently, amounts not subject to NRA withholding that are paid to a U. Help filing 1040x S. Help filing 1040x branch are not subject to Form 1099 reporting or backup withholding. Help filing 1040x   Alternatively, a U. Help filing 1040x S. Help filing 1040x branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. Help filing 1040x In this situation, the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. Help filing 1040x See Nonqualified Intermediaries under  Documentation, later. Help filing 1040x   If the U. Help filing 1040x S. Help filing 1040x branch does not provide you with a Form W-8IMY, then you should treat a payment subject to NRA withholding as made to the foreign person of which the branch is a part and the income as effectively connected with the conduct of a trade or business in the United States. Help filing 1040x Withholding foreign partnership and foreign trust. Help filing 1040x   A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP withholding agreement with the IRS and is acting in that capacity. Help filing 1040x A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT withholding agreement with the IRS and is acting in that capacity. Help filing 1040x   A WP or WT may act in that capacity only for payments of amounts subject to NRA withholding that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. Help filing 1040x A WP or WT acting in that capacity must assume NRA withholding responsibility for these amounts. Help filing 1040x You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts. Help filing 1040x WP and WT withholding agreements. Help filing 1040x   The WP and WT withholding agreements and the application procedures for the agreements are in Revenue Procedure 2003-64. Help filing 1040x Also see the following items. Help filing 1040x Revenue Procedure 2004-21. Help filing 1040x Revenue Procedure 2005-77. Help filing 1040x Employer identification number (EIN). Help filing 1040x   A completed Form SS-4 must be submitted with the application for being a WP or WT. Help filing 1040x The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity. Help filing 1040x Documentation. Help filing 1040x   A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and a written statement identifying the amounts for which it is so acting. Help filing 1040x The statement is not required to contain withholding rate pool information or any information relating to the identity of a direct partner, beneficiary, or owner. Help filing 1040x The Form W-8IMY must contain the WP-EIN or WT-EIN. Help filing 1040x Foreign Persons A payee is subject to NRA withholding only if it is a foreign person. Help filing 1040x A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U. Help filing 1040x S. Help filing 1040x person. Help filing 1040x It also includes a foreign branch of a U. Help filing 1040x S. Help filing 1040x financial institution if the foreign branch is a qualified intermediary. Help filing 1040x In most cases, the U. Help filing 1040x S. Help filing 1040x branch of a foreign corporation or partnership is treated as a foreign person. Help filing 1040x Nonresident alien. Help filing 1040x   A nonresident alien is an individual who is not a U. Help filing 1040x S. Help filing 1040x citizen or a resident alien. Help filing 1040x A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding. Help filing 1040x Married to U. Help filing 1040x S. Help filing 1040x citizen or resident alien. Help filing 1040x   Nonresident alien individuals married to U. Help filing 1040x S. Help filing 1040x citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. Help filing 1040x However, these individuals are still subject to the NRA withholding rules that apply to nonresident aliens for all income except wages. Help filing 1040x Wages paid to these individuals are subject to graduated withholding. Help filing 1040x See Wages Paid to Employees—Graduated Withholding . Help filing 1040x Resident alien. Help filing 1040x   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. Help filing 1040x Green card test. Help filing 1040x An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. Help filing 1040x This is known as the green card test because these aliens hold immigrant visas (also known as green cards). Help filing 1040x Substantial presence test. Help filing 1040x An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. Help filing 1040x Under this test, the individual must be physically present in the United States on at least: 31 days during the current calendar year, and 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year. Help filing 1040x   In most cases, the days the alien is in the United States as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa are not counted. Help filing 1040x This exception is for a limited period of time. Help filing 1040x   For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519. Help filing 1040x Note. Help filing 1040x   If your employee is late in notifying you that his or her status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. Help filing 1040x For more information on making adjustments, see chapter 13 of Publication 15 (Circular E). Help filing 1040x Resident of a U. Help filing 1040x S. Help filing 1040x possession. Help filing 1040x   A bona fide resident of Puerto Rico, the U. Help filing 1040x S. Help filing 1040x Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U. Help filing 1040x S. Help filing 1040x citizen or a U. Help filing 1040x S. Help filing 1040x national is treated as a nonresident alien for the withholding rules explained here. Help filing 1040x A bona fide resident of a possession is someone who: Meets the presence test, Does not have a tax home outside the possession, and Does not have a closer connection to the United States or to a foreign country than to the possession. Help filing 1040x   For more information, see Publication 570, Tax Guide for Individuals With Income From U. Help filing 1040x S. Help filing 1040x Possessions. Help filing 1040x Foreign corporations. Help filing 1040x   A foreign corporation is one that does not fit the definition of a domestic corporation. Help filing 1040x A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia. Help filing 1040x Guam or Northern Mariana Islands corporations. Help filing 1040x   A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons; and At least 20% of the corporation's gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less). Help filing 1040x Note. Help filing 1040x   The provisions discussed below under U. Help filing 1040x S. Help filing 1040x Virgin Islands and American Samoa corporations will apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that possession. Help filing 1040x U. Help filing 1040x S. Help filing 1040x Virgin Islands and American Samoa corporations. Help filing 1040x   A corporation created or organized in, or under the laws of, the U. Help filing 1040x S. Help filing 1040x Virgin Islands or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons, At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U. Help filing 1040x S. Help filing 1040x Virgin Islands, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less), and No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the U. Help filing 1040x S. Help filing 1040x Virgin Islands, American Samoa, Guam, the CNMI, or the United States. Help filing 1040x Foreign private foundations. Help filing 1040x   A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. Help filing 1040x Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to NRA withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate. Help filing 1040x Other foreign organizations, associations, and charitable institutions. Help filing 1040x   An organization may be exempt from income tax under section 501(a) of the Internal Revenue Code even if it was formed under foreign law. Help filing 1040x In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations. Help filing 1040x   Payments to these organizations, however, must be reported on Form 1042-S, even though no tax is withheld. Help filing 1040x   You must withhold tax on the unrelated business income (as described in Publication 598, Tax on Unrelated Business Income of Exempt Organizations) of foreign tax-exempt organizations in the same way that you would withhold tax on similar income of nonexempt organizations. Help filing 1040x U. Help filing 1040x S. Help filing 1040x branches of foreign persons. Help filing 1040x   In most cases, a payment to a U. Help filing 1040x S. Help filing 1040x branch of a foreign person is a payment made to the foreign person. Help filing 1040x However, you may treat payments to U. Help filing 1040x S. Help filing 1040x branches of foreign banks and foreign insurance companies (discussed earlier) that are subject to U. Help filing 1040x S. Help filing 1040x regulatory supervision as payments made to a U. Help filing 1040x S. Help filing 1040x person, if you and the U. Help filing 1040x S. Help filing 1040x branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. Help filing 1040x For this purpose, a financial institution organized under the laws of a U. Help filing 1040x S. Help filing 1040x possession is treated as a U. Help filing 1040x S. Help filing 1040x branch. Help filing 1040x Documentation In most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following. Help filing 1040x The payee is a U. Help filing 1040x S. Help filing 1040x person. Help filing 1040x The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. Help filing 1040x In most cases, you must get the documentation before you make the payment. Help filing 1040x The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. Help filing 1040x See Standards of Knowledge , later. Help filing 1040x If you cannot reliably associate a payment with valid documentation, you must use the presumption rules discussed later. Help filing 1040x For example, if you do not have documentation or you cannot determine the part of a payment that is allocable to specific documentation, you must use the presumption rules. Help filing 1040x The specific types of documentation are discussed in this section. Help filing 1040x However, see Withholding on Specific Income , later, as well as the instructions to the particular forms. Help filing 1040x As the withholding agent, you also may want to see the Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY. Help filing 1040x Section 1446 withholding. Help filing 1040x   Under section 1446 of the Code, a partnership must withhold tax on its effectively connected income allocable to a foreign partner. Help filing 1040x In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. Help filing 1040x This is the same documentation that is filed for NRA withholding, but may require additional information as discussed under each of the forms in this section. Help filing 1040x Joint owners. Help filing 1040x    If you make a payment to joint owners, you need to get documentation from each owner. Help filing 1040x Form W-9. Help filing 1040x   In most cases, you can treat the payee as a U. Help filing 1040x S. Help filing 1040x person if the payee gives you a Form W-9. Help filing 1040x The Form W-9 can be used only by a U. Help filing 1040x S. Help filing 1040x person and must contain the payee's taxpayer identification number (TIN). Help filing 1040x If there is more than one owner, you may treat the total amount as paid to a U. Help filing 1040x S. Help filing 1040x person if any one of the owners gives you a Form W-9. Help filing 1040x See U. Help filing 1040x S. Help filing 1040x Taxpayer Identification Numbers , later. Help filing 1040x U. Help filing 1040x S. Help filing 1040x persons are not subject to NRA withholding, but may be subject to Form 1099 reporting and backup withholding. Help filing 1040x Form W-8. Help filing 1040x   In most cases, a foreign payee of the income should give you a form in the Form W-8 series. Help filing 1040x Until further notice, you can rely upon Forms W-8 that contain a P. Help filing 1040x O. Help filing 1040x box as a permanent residence address provided you do not know, or have reason to know, that the person providing the form is a U. Help filing 1040x S. Help filing 1040x person and that a street address is available. Help filing 1040x You may rely on Forms W-8 for which there is a U. Help filing 1040x S. Help filing 1040x mailing address provided you received the form prior to December 31, 2001. Help filing 1040x   If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. Help filing 1040x You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U. Help filing 1040x S. Help filing 1040x possession. Help filing 1040x Other documentation. Help filing 1040x   Other documentation may be required to claim an exemption from, or a reduced rate of, withholding on pay for personal services. Help filing 1040x The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Help filing 1040x These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income. Help filing 1040x Beneficial Owners If all the appropriate requirements have been established on a Form W-8BEN, W-8ECI, W-8EXP or, if applicable, on documentary evidence, you may treat the payee as a foreign beneficial owner. Help filing 1040x Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Help filing 1040x   This form is used by a foreign person to: Establish foreign status; Claim that such person is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding; and If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty. Help filing 1040x   Form W-8BEN also may be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding. Help filing 1040x For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding. Help filing 1040x Claiming treaty benefits. Help filing 1040x   You may apply a reduced rate of withholding to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the person provides a U. Help filing 1040x S. Help filing 1040x TIN and certifies that: It is a resident of a treaty country; It is the beneficial owner of the income; If it is an entity, it derives the income within the meaning of section 894 of the Internal Revenue Code (it is not fiscally transparent); and It meets any limitation on benefits provision contained in the treaty, if applicable. Help filing 1040x   If the foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner also must certify on Form W-8BEN that it will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to NRA withholding received during a calendar year exceeds, in the aggregate, $500,000. Help filing 1040x   An entity derives income for which it is claiming treaty benefits only if the entity is not treated as fiscally transparent for that income. Help filing 1040x See Fiscally transparent entity discussed earlier under Flow-Through Entities. Help filing 1040x   Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. Help filing 1040x For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States or the treaty country. Help filing 1040x   The exemptions from, or reduced rates of, U. Help filing 1040x S. Help filing 1040x tax vary under each treaty. Help filing 1040x You must check the provisions of the tax treaty that apply. Help filing 1040x Tables at the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding that apply in cases where all conditions of the particular treaty articles are satisfied. Help filing 1040x   If you know, or have reason to know, that an owner of income is not eligible for treaty benefits claimed, you must not apply the treaty rate. Help filing 1040x You are not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which you did not have actual knowledge, or reason to know, that the statements were incorrect. Help filing 1040x Exceptions to TIN requirement. Help filing 1040x   A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements for the following exceptions are met. Help filing 1040x Income from marketable securities (discussed next). Help filing 1040x Unexpected payments to an individual (discussed under U. Help filing 1040x S. Help filing 1040x Taxpayer Identification Numbers ). Help filing 1040x Marketable securities. Help filing 1040x   A Form W-8BEN provided to claim treaty benefits does not need a U. Help filing 1040x S. Help filing 1040x TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. Help filing 1040x For this purpose, income from a marketable security consists of the following items. Help filing 1040x Dividends and interest from stocks and debt obligations that are actively traded. Help filing 1040x Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund). Help filing 1040x Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933. Help filing 1040x Income related to loans of any of the above securities. Help filing 1040x Offshore accounts. Help filing 1040x   If a payment is made outside the United States to an offshore account, a payee may give you documentary evidence, rather than Form W-8BEN. Help filing 1040x   In most cases, a payment is made outside the United States if you complete the acts necessary to effect the payment outside the United States. Help filing 1040x However, an amount paid by a bank or other financial institution on a deposit or account usually will be treated as paid at the branch or office where the amount is credited. Help filing 1040x An offshore account is an account maintained at an office or branch of a U. Help filing 1040x S. Help filing 1040x or foreign bank or other financial institution at any location outside the United States. Help filing 1040x   You may rely on documentary evidence given to you by a nonqualified intermediary or a flow-through entity with its Form W-8IMY. Help filing 1040x This rule applies even though you make the payment to a nonqualified intermediary or flow-through entity in the United States. Help filing 1040x In most cases, the nonqualified intermediary or flow-through entity that gives you documentary evidence also will have to give you a withholding statement, discussed later. Help filing 1040x Documentary evidence. Help filing 1040x   You may apply a reduced rate of withholding to income from marketable securities (discussed earlier) paid outside the United States to an offshore account if the beneficial owner gives you documentary evidence in place of a Form W-8BEN. Help filing 1040x To claim treaty benefits, the documentary evidence must be one of the following: A certificate of residence that: Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident, States that the person has filed its most recent income tax return as a resident of that country, and Is issued within 3 years prior to being presented to you. Help filing 1040x Documentation for an individual that: Includes the individual's name, address, and photograph, Is an official document issued by an authorized governmental body, and Is issued no more than 3 years prior to being presented to you. Help filing 1040x Documentation for an entity that: Includes the name of the entity, Includes the address of its principal office in the treaty country, and Is an official document issued by an authorized governmental body. Help filing 1040x In addition to the documentary evidence, a foreign beneficial owner that is an entity must provide a statement that it derives the income for which it claims treaty benefits and that it meets one or more of the conditions set forth in a limitation on benefits article, if any, (or similar provision) contained in the applicable treaty. Help filing 1040x Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. Help filing 1040x   This form is used by a foreign person to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim that the income is effectively connected with the conduct of a trade or business in the United States. Help filing 1040x (See Effectively Connected Income , later. Help filing 1040x )   Effectively connected income for which a valid Form W-8ECI has been provided is generally not subject to NRA withholding. Help filing 1040x   If a partner submits this form to a partnership, the income claimed to be effectively connected with the conduct of a U. Help filing 1040x S. Help filing 1040x trade or business is subject to withholding under section 1446. Help filing 1040x If the partner has made, or will make, an election under section 871(d) or 882(d), the partner must submit Form W-8ECI, and attach a copy of the election, or a statement of intent to elect, to the form. Help filing 1040x    If the partner's only effectively connected income is the income allocated from the partnership and the partner is not making the election under section 871(d) or 882(d), the partner should provide Form W-8BEN to the partnership. Help filing 1040x Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. Help filing 1040x   This form is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U. Help filing 1040x S. Help filing 1040x possession to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim a reduced rate of, or an exemption from, withholding as such an entity. Help filing 1040x   If the government or organization is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the partner is subject to withholding under section 1446. Help filing 1040x   See Foreign Governments and Certain Other Foreign Organizations , later. Help filing 1040x Foreign Intermediaries and Foreign Flow-Through Entities Payments made to a foreign intermediary or foreign flow-through entity are treated as made to the payees on whose behalf the intermediary or entity acts. Help filing 1040x The Form W-8IMY provided by a foreign intermediary or flow-through entity must be accompanied by additional information for you to be able to reliably associate the payment with a payee. Help filing 1040x The additional information required depends on the type of intermediary or flow-through entity and the extent of the withholding responsibilities it assumes. Help filing 1040x Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U. Help filing 1040x S. Help filing 1040x Branches for United States Tax Withholding. Help filing 1040x   This form is used by foreign intermediaries and foreign flow-through entities, as well as certain U. Help filing 1040x S. Help filing 1040x branches, to: Represent that a foreign person is a qualified intermediary or nonqualified intermediary, Represent, if applicable, that the qualified intermediary is assuming primary NRA withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility, Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust, Represent that a foreign flow-through entity is a nonwithholding foreign partnership, or a nonwithholding foreign trust and that the income is not effectively connected with the conduct of a trade or business in the United States, Represent that the provider is a U. Help filing 1040x S. Help filing 1040x branch of a foreign bank or insurance company and either is agreeing to be treated as a U. Help filing 1040x S. Help filing 1040x person or is transmitting documentation of the persons on whose behalf it is acting, or Represent that, for purposes of section 1446, it is an upper-tier foreign partnership or a foreign grantor trust and that the form is being used to transmit the required documentation. Help filing 1040x For information on qualifying as an upper-tier foreign partnership, see Regulations section 1. Help filing 1040x 1446-5. Help filing 1040x Qualified Intermediaries In most cases, a QI is any foreign intermediary that has entered into a QI withholding agreement (discussed earlier) with the IRS. Help filing 1040x A foreign intermediary that has received a QI employer identification number (QI-EIN) may represent on Form W-8IMY that it is a QI before it receives a fully executed agreement. Help filing 1040x The intermediary can claim that it is a QI until the IRS revokes its QI-EIN. Help filing 1040x The IRS will revoke a QI-EIN if the QI agreement is not executed and returned to the IRS within a reasonable period of time after the agreement was sent to the intermediary for signature. Help filing 1040x Responsibilities. Help filing 1040x   Payments made to a QI that does not assume NRA withholding responsibility are treated as paid to its account holders and customers. Help filing 1040x However, a QI is not required to provide you with documentation it obtains from its foreign account holders and customers. Help filing 1040x Instead, it provides you with a withholding statement that contains withholding rate pool information. Help filing 1040x A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding. Help filing 1040x A qualified intermediary is required to provide you with information regarding U. Help filing 1040x S. Help filing 1040x persons subject to Form 1099 reporting and to provide you withholding rate pool information separately for each such U. Help filing 1040x S. Help filing 1040x person unless it has assumed Form 1099 reporting and backup withholding responsibility. Help filing 1040x For the alternative procedure for providing rate pool information for U. Help filing 1040x S. Help filing 1040x non-exempt persons, see the Form W-8IMY instructions. Help filing 1040x   The withholding statement must: Designate those accounts for which it acts as a qualified intermediary, Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding responsibility, and Provide sufficient information for you to allocate the payment to a withholding rate pool. Help filing 1040x   The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI. Help filing 1040x Primary responsibility not assumed. Help filing 1040x   If a QI does not assume primary NRA withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for the payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to each withholding rate pool for foreign payees. Help filing 1040x Unless the alternative procedure applies, the qualified intermediary must provide you with a separate withholding rate pool for each U. Help filing 1040x S. Help filing 1040x person subject to Form 1099 reporting and/or backup withholding. Help filing 1040x The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Help filing 1040x Primary NRA withholding responsibility assumed. Help filing 1040x   If you make a payment to a QI that assumes primary NRA withholding responsibility (but not primary Form 1099 reporting and backup withholding responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the part of the payment attributable to withholding rate pools for each U. Help filing 1040x S. Help filing 1040x person, unless the alternative procedure applies, subject to Form 1099 reporting and/or backup withholding. Help filing 1040x The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Help filing 1040x Primary NRA and Form 1099 responsibility assumed. Help filing 1040x   If you make a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting and backup withholding responsibility, you can reliably associate a payment with valid documentation provided that you receive a valid Form W-8IMY. Help filing 1040x It is not necessary to associate the payment with withholding rate pools. Help filing 1040x Example. Help filing 1040x You make a payment of dividends to a QI. Help filing 1040x It has five customers: two are foreign persons who have provided documentation entitling them to a 15% rate of withholding on dividends; two are foreign persons subject to a 30% rate of withholding on dividends; and one is a U. Help filing 1040x S. Help filing 1040x individual who provides it with a Form W-9. Help filing 1040x Each customer is entitled to 20% of the dividend payment. Help filing 1040x The QI does not assume any primary withholding responsibility. Help filing 1040x The QI gives you a Form W-8IMY with which it associates the Form W-9 and a withholding statement that allocates 40% of the dividend to a 15% withholding rate pool, 40% to a 30% withholding rate pool, and 20% to the U. Help filing 1040x S. Help filing 1040x individual. Help filing 1040x You should report on Forms 1042-S 40% of the payment as made to a 15% rate dividend pool and 40% of the payment as made to a 30% rate dividend pool. Help filing 1040x The part of the payment allocable to the U. Help filing 1040x S. Help filing 1040x individual (20%) is reportable on Form 1099-DIV. Help filing 1040x Smaller partnerships and trusts. Help filing 1040x   A QI may apply special rules to a smaller partnership or trust (Joint Account Provision) only if the partnership or trust meets the following conditions. Help filing 1040x It is a foreign partnership or foreign simple or grantor trust. Help filing 1040x It is a direct account holder of the QI. Help filing 1040x It does not have any partner, beneficiary, or owner that is a U. Help filing 1040x S. Help filing 1040x person or a pass- through partner, beneficiary, or owner. Help filing 1040x   For information on these rules, see section 4A. Help filing 1040x 01 of the QI agreement. Help filing 1040x This is found in Appendix 3 of Revenue Procedure 2003-64. Help filing 1040x Also see Revenue Procedure 2004-21. Help filing 1040x Related partnerships and trusts. Help filing 1040x    A QI may apply special rules to a related partnership or trust only if the partnership or trust meets the following conditions. Help filing 1040x It is a foreign partnership or foreign simple or grantor trust. Help filing 1040x It is either: A direct account holder of the QI, or An indirect account holder of the QI that is a direct partner, beneficiary, or owner of a partnership or trust to which the QI has applied this rule. Help filing 1040x For information on these rules, see section 4A. Help filing 1040x 02 of the QI agreement. Help filing 1040x This is found in Appendix 3 of Revenue Procedure 2003-64. Help filing 1040x Also see Revenue Procedure 2005-77. Help filing 1040x Nonqualified Intermediaries If you are making a payment to an NQI, foreign flow-through entity, or U. Help filing 1040x S. Help filing 1040x branch that is using Form W-8IMY to transmit information about the branch's account holders or customers, you can treat the payment (or a part of the payment) as reliably associated with valid documentation from a specific payee only if, prior to making the payment: You can allocate the payment to a valid Form W-8IMY, You can reliably determine how much of the payment relates to valid documentation provided by a payee (a person that is not itself a foreign intermediary, flow- through entity, or U. Help filing 1040x S. Help filing 1040x branch), and You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required. Help filing 1040x The NQI, flow-through entity, or U. Help filing 1040x S. Help filing 1040x branch must give you certain information on a withholding statement that is associated with the Form W-8IMY. Help filing 1040x A withholding statement must be updated to keep the information accurate prior to each payment. Help filing 1040x Withholding statement. Help filing 1040x   In most cases, a withholding statement must contain the following information. Help filing 1040x The name, address, and TIN (if any, or if required) of each person for whom documentation is provided. Help filing 1040x The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided. Help filing 1040x The status of the person for whom the documentation has been provided, such as whether the person is a U. Help filing 1040x S. Help filing 1040x exempt recipient (U. Help filing 1040x S. Help filing 1040x person exempt from Form 1099 reporting), U. Help filing 1040x S. Help filing 1040x non-exempt recipient (U. Help filing 1040x S. Help filing 1040x person subject to Form 1099 reporting), or a foreign person. Help filing 1040x For a foreign person, the statement must indicate whether the person is a beneficial owner or a foreign intermediary, flow-through entity, or a U. Help filing 1040x S. Help filing 1040x branch. Help filing 1040x The type of recipient the person is, based on the recipient codes used on Form 1042-S. Help filing 1040x Information allocating each payment, by income type, to each payee (including U. Help filing 1040x S. Help filing 1040x exempt and U. Help filing 1040x S. Help filing 1040x non-exempt recipients) for whom documentation has been provided. Help filing 1040x The rate of withholding that applies to each foreign person to whom a payment is allocated. Help filing 1040x A foreign payee's country of residence. Help filing 1040x If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc. Help filing 1040x ). Help filing 1040x In the case of treaty benefits claimed by entities, whether the applicable limitation on benefits statement and the statement that the foreign person derives the income for which treaty benefits are claimed, have been made. Help filing 1040x The name, address, and TIN (if any) of any other NQI, flow-through entity, or U. Help filing 1040x S. Help filing 1040x branch from which the payee will directly receive a payment. Help filing 1040x Any other information a withholding agent requests to fulfill its reporting and withholding obligations. Help filing 1040x Alternative procedure. Help filing 1040x   Under this alternative procedure the NQI can give you the information that allocates each payment to each foreign and U. Help filing 1040x S. Help filing 1040x exempt recipient by January 31 following the calendar year of payment, rather than prior to the payment being made as otherwise required. Help filing 1040x To take advantage of this procedure, the NQI must: (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. Help filing 1040x You must receive the withholding statement with all the required information (other than item 5) prior to making the payment. Help filing 1040x    This alternative procedure cannot be used for payments to U. Help filing 1040x S. Help filing 1040x non-exempt recipients. Help filing 1040x Therefore, an NQI must always provide you with allocation information for all U. Help filing 1040x S. Help filing 1040x non-exempt recipients prior to a payment being made. Help filing 1040x Pooled withholding information. Help filing 1040x   If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, prior to the payment of a reportable amount. Help filing 1040x A withholding rate pool is a payment of a single type of income (as determined by the income categories on Form 1042-S) that is subject to a single rate of withholding. Help filing 1040x For example, an NQI that has foreign account holders receiving royalties and dividends, both subject to the 15% rate, will provide you with information for two withholding rate pools (one for royalties and one for dividends). Help filing 1040x The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment. Help filing 1040x Failure to provide allocation information. Help filing 1040x   If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. Help filing 1040x You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules . Help filing 1040x An NQI is deemed to have f