As the U.S. tax season is currently underway, many new immigrants who have just received their Green Cards have joined the ranks of U.S. tax residents and are busy with tax filing. Many EB-5 investors mistakenly believe that if they have not yet received a U.S. Green Card or are not currently residing in the United States, they do not need to be involved in U.S. tax filing.
In fact, this is not the case. Strictly speaking, even if you are not a U.S. tax resident, as long as you have participated in investments in the United States and generated income, you are required to file a declaration with the Internal Revenue Service (IRS).
1. What is Schedule K-1?
In a partnership, there are general partnership and limited partnership forms. The project entity to which an EB-5 project belongs is a limited partnership, consisting of one general partner and many limited partners. Similar to China, in the United States, a limited partnership itself does not pay corporate income tax. According to the profit and loss distribution rules stipulated in the partnership agreement, all income and expenses flowing to the partners must be reported according to their respective tax returns.
Schedule K-1 (pictured below) is the form used to report to the IRS each partner's share of the partnership's income, expenses, dividends, as well as all capital and potential corresponding liabilities. The partnership must summarize this form with other tax filing-related forms to file the partnership income tax return with the IRS.
2. What information does Schedule K-1 mainly reflect?
In an EB-5 Regional Center project, every EB-5 investor, as a limited partner, will periodically receive a project Schedule K-1 issued by the project's limited partnership. This serves as an income voucher reflecting the project's operations from the previous year, allowing investors to understand the basic status of their project investment. Schedule K-1 mainly reflects the increase or decrease in the investment amount of the project limited partner (i.e., each individual EB-5 investor), the liabilities assumed (which are usually non-existent in EB-5 projects), and the annual income, gains, losses, and expenses allocated based on the investment proportion or other rules stipulated in the partnership agreement.
3. When is Schedule K-1 generally filed with the IRS?
The project partnership files its partnership income tax return with the IRS on March 15 this year (previously April 15; the policy changed this year). The IRS allows companies to extend this to September 15.
Whether you are a U.S. tax resident or a non-tax resident with income generated within the United States, you need to determine based on your own situation whether you need to file tax documents, including Schedule K-1 (if you participated in a limited partnership investment), with the IRS before the annual individual income tax filing deadline (generally April 15; in 2017, because April 15 and the following days were weekends and holidays, the deadline was April 18; for non-tax residents without earned income, the deadline is June 15).
If the project entity delays the filing of its partnership income tax return to September 15, under the delayed filing status of Schedule K-1, each investor's individual income tax return can also be extended accordingly. This year, it can be extended to October 16 (generally October 15; this year October 15 is a weekend). However, you must estimate your other income and confirm whether there is any tax due before this date.
4. Why are the income and expense columns on some EB-5 project Schedule K-1 forms blank?
According to the partnership's capital account balance, even if a limited partner has not been allocated any income, gains, losses, or deductions from the partnership for the current year, the partnership must still send a Schedule K-1 to any limited partner who had a cash balance in the partnership account during the year. Therefore, for many EB-5 projects where there is no income or expense in the first year, or where the investor's funds have not yet moved from the escrow account into the project, many EB-5 investors receive a Schedule K-1 that only shows the investor's basic information, with the income and expense columns left blank.
5. If I receive a Schedule K-1 showing income, do I need to file taxes?
If the EB-5 investor has not yet landed in the United States and has no other income within the United States, generally speaking, because the annual investment income generated by EB-5 projects is very small, it will basically not exceed the tax-free threshold stipulated by the immigration authorities. Therefore, in this case, the project limited partnership will usually file with the IRS, and the EB-5 investor only needs to keep the form on file without being taxed.
If the income is subject to tax, the project partnership usually withholds income tax in accordance with the regulations requiring withholding tax for foreign investors (the stipulated withholding tax rate may be higher than the investor's actual tax rate). The investor can calculate whether a tax refund is generated, and if so, can file an application for a tax refund.
If the EB-5 investor has not yet landed in the United States but has other income within the United States, such as rent or securities, in addition to the EB-5 project, it is necessary to see whether the overall income exceeds the tax-free threshold. If it exceeds, not only is filing required, but it is also necessary to calculate whether the corresponding income tax needs to be paid according to regulations.
If the EB-5 investor is a tax resident who has already obtained a U.S. Green Card, Schedule K-1 is just one of their tax filing documents. Therefore, they need to summarize the project Schedule K-1 into their income and expense information before the tax filing deadline, which is generally reported in the individual income tax return for the previous year.
6. What are the common types of income and expenses that may appear on an EB-5 project Schedule K-1?
The most common income and expenses that may appear on an EB-5 project Schedule K-1 are as follows:
Line 1: Ordinary Business Income (Loss)
Such as income generated from the project enterprise's operations, which is usually reported on Schedule E of the individual income tax return.
Line 5: Interest Income
Such as interest obtained from project enterprise loans, which is usually reported on Schedule B of the individual income tax return.
Line 13: Other Deductions
Usually includes various business expenses incurred in the operation of the project enterprise, such as management fees, loan interest, etc. Depending on the category, there are more specific explanations for expenses on this line, which are usually reported on Schedule A of the individual income tax return. However, some expense deductions need to be confirmed separately; it is better to consult a professional tax advisor.