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Welcome and thank you for joining us for today's webinar.

Before we move along with our session, let me make sure you're in the right place.

Today's webinar Taxation of Nonresident Alien Individuals and this webinar is scheduled for approximately 100 minutes.

So with that, let me introduce today's speakers.

So first we have James Kwong.

James is a Supervisory Internal Revenue Agent with the Outbound Practice Networks and the LB&I Exchange Withholding an International Individual Compliance Practice area.

James that is a mouthful.

He advises develops technical content and training.

He facilitates workshops and network events and develops LB&I campaigns in the area of inbound activities of the nonresident alien individuals.

Areas include issues related to effectively connected income, determination of a US trade or business, taxation of compensation from employment, income exempt under a tax treaty, and taxation of foreign athletes and entertainers.

His speaking engagements which also include content development consists of virtual and Face-to-face presentations such as the IRS Nationwide Tax Forum, webinars on emerging issues, CPE classes on technical topics and network events on technical and procedural issues related to LB&I campaigns.

Prior to joining the IRS, James worked in public accounting as a Senior Tax Manager specializing in tax planning and compliance for family owned businesses and high net worth individuals.

James received his Master of Science and Taxation from DePaul University, his Bachelor of Science and Accounting from the University of Illinois at Chicago and is a licensed CPA and our next, our other speaker is Andy Daxon.

Andy is a Senior Revenue Agent with a Withholding Practice Network in the LB&I, Withholding and International Individual Compliance Practice Area.

Andy provides assistance to examiners training, facilitates workshops and network events, and develops LB&I campaigns with respect to Chapter 3 withholding on and the taxation of Fixed Determinable, Annual, Periodical Income and Effectively Connected, Effectively Connected Income, compensation from employment, foreign athletes and entertainers and income exempt under a tax treaty received by nonresident aliens.

Andy has worked for the Internal Revenue Service for 35 years including 12 in the International Practice Area, five years in the International Individual Compliance Area of the LB&I Business Operating Division, five years in the SBSE International and 13 years in regular exam.

So with that I'm going to turn it over to these dynamic speakers and James is going to start the presentation.

James, the mic is all yours.

All right, thank you, Yvette.

Thank you for having us here as well and thank you for everyone attending this session today.

Taking time out of your important work day.

I'm sure it's starting to get busy again with the September 15th deadlines.

Okay, So here on the slide here we do have our agenda and we what we want to do here today is explain generally how nonresident alien individuals are taxed and we'll refer them to as NRAs throughout this presentation. We want to identify the common types and tax treatment of effectively connected income and US source non-business Fixed, Determinable, Annual or Periodic otherwise known as FDAP income.

We also want to identify the common types of deductions and tax credits that would be available to NRA individuals.

Okay, so let's get started here.

So let's, let's go over an overview of NRA taxation.

So as most of you know, US citizens and resident alien individuals, they are taxed on their worldwide income and that's regardless of where it's earned or were it's sourcing, it's sourced.

However, NRAs are taxed differently.

They are taxed on a territorial system and that's only on income that is sourced to the US and income that is effectively connected with the US trade or business.

So it's really important to know the sourcing rules as they do determine if income is sourced within or outside the US, which in turn is a factor in determining whether that income is taxable in the US.

So the sourcing rules, they can be found on sections 861 through 865, and we will go over some of these source rules in a couple of slides.

Okay, so there are generally two categories of income that NRAs are subject to US tax.

The first being income that is Fixed, Determinable, Annual, or Periodic or commonly called as FDAP, so FDAP income.

And that second category of income is income that is effectively connected with a US trade or business otherwise known as ECI or Effectively Connected Income.

The statutory authority to tax these types of income and that could be found in section 871(a) for non-ECI FDAP and section 871(b) for ECI.

So under 871(a) non-ECI FDAP income that is from sources within the United States and that's taxed on a gross basis.

That basically means that no deductions are allowed and it's also taxed at a statutory flat 30% rate.

If there is an applicable income tax treaty, that rate can be lowered or even exempt from tax. For ECI tax, NRAs are taxed under 871(b) of the code and it's taxed at graduated rates on their net taxable income, just like a US citizen or resident alien.

Although again, generally US persons are subject to US tax on worldwide income. So being taxed on their net taxable income, that basically means that deductions can be taken against that income as long as they're properly allocated and apportioned, and also you need to have a true and accurate tax return timely filed.

So this contrast the taxation of again the non-business FDAP income that we had just discussed in which that income is taxed on a gross basis meaning no deductions are allowed.

So again ECI net basis, non-business FDAP income, gross basis. Okay, so let's first go over the sourcing of income rules.

So the source of income determination that really is a, it's very fundamental for determining whether a NRA, what the NRA's tax consequences are.

So identifying the country in which the taxpayers earn the income, that's an important step to determine the taxability of a transaction.

In general, the US source rules that are based on location of the underlying income producing property or activity that generates the income.

However, there are, the source of certain income would be based on residency.

And as stated previously, again you want to look at the sections 861 through 865 and those will classify the various types of income by source.

So as you can see on the slide here, it summarizes the most common items of income and that factor determining the source of such income.

So let's go through the summary line the, the summary table line by line for personal services income.

The source of this type of income is the place where the services are performed. Personal services income, they would include salaries, wages, fees.

Can someone, everybody mute their mics?

We're hearing some background noise.

We're hearing background noise if someone can mute all their mics.

Thank you again.

I'm sorry about that.

Personal services income includes salaries, wages, fees, commissions, fringe benefits and self-employment income.

And and we will go over in a little more detail on this item on the next slide, but let's move on to the next line item here.

So we have interest income and it is the residence of the payor that determines the source.

So interest payments from US residents and US corporations, they're generally characterized as US source income and interest paid by foreign corporations and nonresidents and that would include citizens residing abroad that will generally be characterized as foreign source income.

For dividend income, it is sourced where the payor corporation is incorporated.

But generally dividends received from a domestic Corp are US source.

Dividends received from a foreign Corp would be considered foreign source. And the source of rental and royalty income that would be determined by the place where the property is located or used.

So the source of rental income for tangible property that will depend on the place of where the property is physically located when used. The source of royalties from licensees of intangible property and that would also include patents, copyrights, trade secrets and franchises, those are assigned to the place where the intangibles are used.

So, for example, royalties for the exhibition of movies have their source in the place of exhibition and not where the films were produced.

Payments for worldwide use of intangibles, they may be apportioned between domestic and foreign sources on the basis of the relative values of the use rights. For gains on sales of real property, the factor determining source is the location of that property.

So gain or loss of the disposition of US real property or stock of a US real property holding corporation that would be US source income.

Gain from the sale of real property located outside the US that would be foreign source income.

So the gain or loss from the sale exchange of personal property that generally has its source in the US if the taxpayer has a tax home in the United States.

So if the taxpayer does not have a tax home in the United States, the gain or loss is generally considered to be from sources outside of the US. Okay, so for pensions, the source of pension income is where the services were performed that earned the pension.

So any pension benefits earned would be considered US sourced to the extent that they consist of employer contributions for services within the US and foreign sources to the extent of employer contributions for services outside the US. For scholarship, fellowship, grants, prizes, and awards, source would be the residents of the payor regardless of who actually distributes that, those funds.

And for inventory, the source of income on the sale of inventory held for sale to customers in the ordinary course of business that would depend on whether the taxpayer acquired the goods by purchase or produced them.

So the source of income realized from the sale of inventory property that's acquired by purchase, that will generally be determined by the location of the property at the time of sale.

For inventory that are produced by the sellers, any gains, profits, and income from the sale or exchange of such inventory that would be allocated and apportioned on the basis of the production activities with respect to that property. Title passage and location of sale, those are not factors in determining the source of income from the sale of exchange of inventory property if the inventory is produced entirely in the US the income is US source income.

If the inventory is produced entirely in the foreign country, the income is foreign source. Income from the sale or exchange of inventory produced in both the US and a foreign country, that would be considered mixed source income. Okay, so the next slide, this discusses when services performed both in the US and foreign country.

So as previously stated, the source of income from the personal, from the performance of personal services is the place where the services are performed.

So if the services are performed both inside and outside the US, then we have to do an apportionment.

Generally an apportionment is based on a time basis and you can actually find find these rules in the regs under 1.861-4.

You would use the number of days, if the individual is an employee, as you can see right after the second bullet point.

Here's the formula.

So to arrive at US source compensation, you would take the total compensation.

You would multiply it by the fraction of days of services were performed in the US, and you would take that over the total days services were performed for the whole tax year.

If not an employee, then apportionment would be based on facts and circumstances of each case.

So an example would be, let's say, for athletes, entertainers.

The Treasury has proposed regs from the source of compensation for personal services for these types of taxpayers and it would be determined on an event basis.

So under these regs, we proposed regs, the source of compensation for such services is the location of the particular site.

Okay, so that wraps up the general sourcing of income rules.

So let's discuss some of the basics of FDAP.

So as mentioned earlier, FDAP is Fixed, Determinable, Annual or Periodic and is one of the two taxing regimes in the US that the US uses the tax NRAs FDAP income that includes all US sourced items that are not connected with the US trade or business other than capital gains and items of income excluded from gross income such as municipal interest and a qualified scholarship income.

Those two types of income are, are excluded by the code.

You want to note that one thing that to note, when we usually refer to FDAP, we usually think of passive non-business income like interest and dividends.

But it's really important to note that certain kinds of FDAP income, they can be treated as ECI for various reasons and you can see those reasons on the on the slide here.

So the reasons could be, you know, certain code sections require the income to be treated as ECI.

We have certain code sections that allow elections to treat the income to be ECI.

We also have certain kinds of investment income treated as ECI if they meet certain tests such as the Asset Use Test or the Business Activities Test and we're going to discuss these two tests later when we talk about ECI. Okay, so on the next slide here we have code section 871(a) and that imposes a 30% gross basis tax and I mentioned this earlier in the presentation a flat tax on the NRAs FDAP income that is not effectively connected with the US trade or business.

Because previously I said that you know FDAP income could be considered ECI and in this case the FDAP income that is not considered ECI.

So non-business FDAP again taxed on the 30% gross basis, based on the the statutory rate of 30%.

So therefore on this slide here we are referring to it as non-business FDAP income. And again, gross basis tax means that the tax is imposed on the gross amount of the payments. And again that NRA is not allowed to take any deductions against this type of income.

So one of the administrative challenges of the taxing an NRA is really collecting the tax.

So since NRAs may not be living in the US or have any US assets.

So to alleviate this problem code Section 1441 was enacted and that provides a mechanism to withhold, to do a mandatory 30% withholding imposed under Section 871(a).

So this is referred to as, withholding at the source, and it requires the payor of the payment to withhold the 30% tax and remit it to the IRS and the payor would be referred to in this case as the withholding agent.

Also, there are certain types of FDAP income that may be exempt from that 30% tax under the section 871 and/or under withholding section 1441.

An example of this would be US source interest income earned on bank deposits.

I mentioned this earlier.

This type of income is not taxable to an NRA under the code.

And finally, many income tax treaties will reduce or eliminate the, this above tax imposed under the code and the corresponding withholding obligation.

So it's really important that you determine if the NRA is eligible for treaty benefits and, and if they are, you want to determine the rules under that treaty for that type of income received by him or her. Okay, so the next slide here this, this basically lists some of the common types of income that would be considered the, the non-business passive type, FDAP income.

This type, these types of income would be subject again to that 30% gross basis tax and subject to withholding unless there is that statutory exception you know like that interest income example I provided earlier or if a tax treaty reduces or eliminates that tax.

So here we have, we have interest, dividends, rents, royalties, prizes and awards, social security benefits and gambling winnings. Okay, so there are some things to note regarding a couple of the FDAP items listed in the previous slide.

So as previously stated any US source portfolio interest income and that would be interest income from a US bank, savings and loan associations, credit unions or similar institutions.

But that type of interest income that is not effectively connected with the US trade or business that is not taxable per the code and it would be under section 871(h). There are certain gambling winnings from, from certain games like blackjack, craps, roulette those are nontaxable as well to NRAs under the code and that would be under 871(j).

And we do want to note that since these items of income listed above that are these are nontaxable, so any related expenses would be nondeductible such as losses related to the games just mentioned above here.

Well with that said I think it's time for our first polling question Yvette. James.

yes it is audience, here's our first polling question.

Select the answer that best answers the question, Which of the following is never included as FDAP income?

Is it A, dividend income; B rental income; C, capital gain income; or D, gambling winnings?

So take a moment and click the radio button that best answers the question, Which of the following is never included as FDAP income?

So I'll give you a few more seconds to make your selection.

Okay, so we're going to stop the polling now and let's share the correct answer on the next slide.

And the correct response is C capital gain income.

Let's see how well you all did.

Uh oh, I see that 37% of you responded correctly.

James, would you mind clarifying for us. Yes, capital gain income is, is usually considered, you will always think of that as FDAP.

But it, it really isn't, doesn't fall within the actual description of FDAP.

When you look at the description of FDAP, it's, it's Fixed, Determinable, Annual or Periodic. Capital gain income is you know it depends on each transaction and it does not fall within, within that for that, that for that category. There are, there are a lot of treatments with capital gain, gain income that's, that's kind of follow the same rules.

I hear a lot of background noise.

So I just want to let whoever has their mic on to mute that.

So we'll we'll show later, we'll, we'll discuss later how capital gains, certain capital gains are treated as well, but they are not included ss FDAP income and that's just one of the, one of the rules basically now.

Thank you for the clarification James.

I'm just going to ask for a little bit more just because there was some background noise.

So I'm not I can barely hear you.

I'm not sure if our audience could James you there.

I think we lost James.

Well, I'm just going to give a little blurb. As mentioned FDAP income includes all you are US source items other than capital gains and certain other limited exceptions.

And we do want to note that capital gain income is also subject to 30% withholding even though it's not considered FDAP.

So again James I'm going to turn it back over to you, I hope you're there.

Yes, sorry about that.

I think yes something, something was off with that.

So I thought that okay technology these days, right?

Okay, so let's move on the slide 31 here and we're going to do an overview of ECI.

So, so that we just covered nonbusiness FDAP income.

So let's move on to the second part of that NRA tax regime under 871(b).

And again we've, I've mentioned this multiple times already during the, during the class it's for effectively connected income commonly referred to as ECI.

So NRAs they are, you know they're taxed on their ECI at graduated rates on their net taxable income just like a US citizen or resident alien being taxed again on their net taxable income means that deductions can be taken against that income. But you have to make sure those deductions are properly allocated and apportioned and a timely and accurate tax return is is filed as well.

So again this contrast, that taxation of nonbusiness FDAP income that we had just discussed and that would be on a gross basis, meaning no deductions would be allowed.

So there are two key concepts that must be satisfied in order to have a tax liability under 871(b) and we're going to talk about that right now.

So first, the NRA, they must be engaged in a US trade or business, engaged in the US trade or business, that's the first concept that needs to be satisfied.

And two, the income earned must be effectively connected with that trade or business and just like a reduction or elimination of that flat 30% tax on nonbusiness FDAP income of an NRA, income tax treaties, they may come into play as well.

For ECI, there are many tax treaties that have permanent establishment or personal services articles that may limit the US taxation of ECI. Okay, so let's start with that first concept in which the taxpayer must be engaged in the US trade or business.

So unfortunately the term US trade or business then it's not fully defined in the code or regulations.

So as a result, the definition of it really is really defined through case law.

So in general that the threshold of a US trade or business, it's low and it's based on really heavily on the facts and circumstances of each case.

The courts will consider whether the activities would be regular, substantial, continuous, isolated, sporadic or incidental activities.

Those do not constitute business activities. Also active management of investments they do not qualify as, qualify as one as well regardless of how extensive the management activities are and additionally the ownership of income producing property that would not qualify as a US trade or business.

Now if you look at the last bullet point on this slide here, there's a, the Lewenhaupt case and that is probably the leading case holding that activities of an agent are imputed to the principal in determining whether that principal has a US trade or business.

So in this case the Tax Court held that an NRA who owned multiple real properties in the US that, that NRA had a US trade or business even though he was not physically present in the US during the years because he had a resident agent who had a power of attorney which allowed the agent the power to buy, sell, lease and mortgage real estate for the NRA and he also managed the properties. So this case really articulates a test for a US trade or business and, and is repeated in several other cases.

So for this purpose a trade or business consists of activities that would be considerable, continuous and and regular.

Mere ownership or receipt of income is not a trade or business.

The code does provide a partial definition, however, of a US trade or business and you can find it under 864(b), and that includes the performance of personal services within the United States.

So by definition, if an NRA performs personal services in the US, he or she will be considered engaged in a US trade or business pertaining to those services.

There are a couple of court cases listed on this slide and those are examples of personal services treated as ECI.

We have the Goosen case in which the taxpayer is, they were engaged in the US trade or business of playing golf and had certain endorsement contracts which required him to perform personal services under the endorsement contract while playing golf.

So as a result, a portion of the income he earned from these contracts that was considered ECI from this trade or business of playing golf. In the Santos case, this taxpayer was a teacher participating in an exchange program.

She was employed as a teacher, which is performing personal services.

And because she was doing that, she was considered engaged in the US trade or business.

Now that we understand that performing personal services in the US is considered a US trade or business, you should also know that there is a limited exception for personal services provided by an NRA for a foreign employer. Okay, so there is an exception here.

So if the following conditions are met.

It's based on you can see them on this slide here.

The NRA would not be considered engaged in the US trade or business.

So first, the NRA, they have to be employed by another NRA and it could be a foreign partnership or a foreign Corp.

And the foreign partnership or foreign Corp is not engaged in a US trade or business or by the foreign office of a US person.

So in any circumstance that employer it must be foreign or a part of a foreign office.

Second, the NRA must be temporarily present in the US for no more than 90 days during the taxable year.

And finally, the compensation for services does not exceed $3,000.

So it's, it's good to know this rule, but it really doesn't come up very often, at least in what we've seen.

But it's really meant to provide relief to foreign people who are in the US for a short period of time and that are really not providing any significant personal services in the US here.

A good example would be, let's say a foreign corporation sends an employee to the US for a week to attend a conference.

So that would be an example where this employee may fall within this exception. And also that $3,000 is not really, it hasn't been adjusted for inflation.

So the taxpayer in this case doesn't really have to earn very much to fall outside the exception. Okay, so there is another exception to the US trade or business and that's for trading and investing.

So in in general, an NRA can have a US trade or business from trading and investing activities, but there is an exception for trading in stocks, securities and commodities.

So if you look at Section 864(b)(2)(A), there are two safe harbors.

So the first one and this one applies to both dealers and securities and the casual investor.

So that's when an NRA trades through a resident broker, whether that dealer is trading through like a brokerage like TD Ameritrade, through a commission agent or another independent agent and if that NRA does not have an office or a fixed place of business in the US through which these transactions are effective.

So that would not apply in this case.

It would be a safe harbor would be met.

So essentially what this means is that an NRA can trade through an agent and they would not be considered engaging in the US trade or business.

The second safe harbor is when an NRA trades on his our own accounts and that's either through employees or through a resident broker, commission agent, whether or not such an employee or agent has discretionary authority to make decisions affecting the transactions.

So like for example here, let's say that an NRA has a portfolio of stocks and mutual funds managed by a brokerage firm in the US.

The brokerage firm has authority to manage the portfolio including executing the purchase and sales of securities in the portfolio.

This would not cause the NRA to be engaged in the US trade or business.

It is important to note that this safe harbor is not available to dealers.

So this safe harbor, the second one exempts a broader category of activities, trading through brokers or through employees, but it's only for a narrower group.

So only NRA non-dealers can apply, can, can fall under this exception.

All right, Yvette, I think it's time for a couple of polling questions.

James, you are correct. Audience, we are going to have a couple of polling questions.

So here's our second.

What level of activity in the United States suggests that a taxpayer is engaged in a US trade or business?

Is it, A, regular, substantial and continuous activities in the United States; B, how many days the individual was in the United States; C, the amount of income received in the United States; or D, volume of sales revenue with the US versus outside the US.

So take a moment and click the radio button that best answers the question. What level of activity in the United States suggests that a taxpayer is engaged in a US trade or business?

So I'll give you a few more seconds to make your selection.

Okay.

We're going to stop the polling now and let's share the correct answer on the next slide.

And the correct response is, A, regular, substantial and continuous activities in the United States.

And let's see how you all did I see that, oh, 81% of you responded correctly.

That is a great job guys.

James, good job.

And let's see audience, we have another question.

You're doing so good, I want to keep you guys on this roll.

So here's the third polling question.

So select the option that best answers the statement.

The performance of personal services in the US is always considered to be a US trade or business.

Is the correct answer, A, yes; B, no, because an NRA cannot be in a US trade or business; C, no, because there is a de minimis exception; or D, no, because the performance of personal services can never be considered a US trade or business.

So take a moment and click the radio button that best answers the question or best answers the statement.

The performance of personal Services in the US is always considered to be a US trade or business.

So I'll give you a few more seconds to make your selections.

Okay, We're going to stop the polling now and let's share the correct answer on the next slide.

And the correct response is, C, no, because there is a de minimis exception.

Uh.

Oh, let's see.

I see that 90.

Oh, no.

Sorry, 55% of you responded correctly.

All right, James, I'm going to need to know if you can clarify the answer to this one for us.

Well, maybe I'm just not really good at speaking.

No.

Yeah, that's.

It's just basically the code. We've, we've talked about performance of personal services.

It's always considered is, is generally considered a US trade or business under the code.

But there is that de minimis exception.

We did have a previous slide on that next slide or the code section would be under code section 864(b)(1) that provides a limited exception.

So it's basically under the code.

It doesn't really apply most of the time because it's very because the, the items are very rare as far as the dollar amounts as well.

So it doesn't really come up much.

But like I said, generally US trade or business, if there's performance of personal services, just be aware of this very small exception that's that it doesn't come up, come up much.

Maybe again like I said, if there's you send an employee to the US to attend a conference for a week and that, that individual's allocated wages is not more than $3,000, in that case, this exception would apply.

Hopefully that clarifies hopefully audience, I hope that clarifies it for you. Clarified it for me.

So thank you, James.

I'm going to turn it back over to you.

All right.

Thank you very much.

Okay.

All right.

So now that we understand how to determine whether there's a US trade or business, now we have to figure out whether this income is effectively connected to that US trade or business.

So again, this is the second part.

So it's really not enough to have a US trade or business to tax income.

That income has to be effectively connected in order to be taxable.

So what is effectively connected income? ECI is taxable income other than certain investment income which is earned from sources in the US while engaged in the US trade or business Section 864(c) as you can see on the second bullet point here and that sets the criteria determining whether income, gain or loss should be treated as ECI.

So over the next few slides we'll go over, we'll go further into this criteria.

So as mentioned earlier in previous slides, section 871(b)

provides that a NRA individual would be subject to tax at graduated rates again so just like a US person and also be taxed on a net basis Okay.

So as previously stated, one of the considerations that arise when considering whether an NRA has ECI is whether that income is that, is it effectively connected with a US trade or business.

So the rules in determining whether income is effectively connected, they would apply differently depending on whether the income is from US or foreign sources.

And we can look at Section 864(c) and the related Treasury Regs for more clarification on that.

So let's talk about US source income treated as ECI first.

So there are two categories of US source income that may be effectively connected with the US trade or business under the code.

And they are periodical, periodical income which includes FDAP income, portfolio interest income, gain, loss from the sale or exchange of a capital assets and second, all other US source income gains and losses.

So let's talk about this first category.

US source FDAP income.

So NRAs are generally subject to US income taxes on their FDAP income from sources within the US. So as stated previously, examples of FDAP income would include US source interest, dividends, rents, royalties, etcetera.

As previously stated, FDAP income may or may not be considered ECI, so they may not be effectively connected with the US trade or business.

So, under 871(a) FDAP income that is not effectively connected with the US trade or business again is taxed a flat 30% rate.

Tax treaties may provide a lower or exemption in full on specified income items. FDAP income that is considered ECI will be ECI.

Again taxable at graduated rates.

So now we know that US soure FDAP income can be treated as ECI and taxed at graduated rates. Again if not ECI, it would be taxed at 30% under 871(a).

So we need to find out when ECI is or when FDAP income is considered ECI and to make this determination we would have to apply one of two tests and these tests were mentioned earlier.

The first Test is the asset use test and that looks to see if the income is derived from assets used or held for use in the conduct of the US trade or business.

The second test is the is the business activities test, which looks to see if the activities of the US business were a material factor in the realization of that income, gain or loss.

So let's take a closer look at each of these two tests.

Let's go over the first one and that's the asset use test.

So under the asset use test, an asset, and this is under the Treasury Regs, an asset shall be treated as used in or held for use in the conduct of the US trade or business if the asset is either, one, held for the principal purpose of promoting the present conduct of a US trade or business.

So an example here would be plant and equipment.

A capital gain or loss from the sales of such equipment would be considered ECI, two, acquired and held in the ordinary course of a US trade or business.

So an example here would be accounts and notes receivable for a good sold or service performed in the business.

And three, it would be the asset is held in a direct relationship to that US trade or business.

So an example here would be bank accounts or securities that are held to meet the present needs of that business.

So in determining whether an asset is held in a direct relationship to the US trade or business, you have to consider whether that asset is needed for that trade or business, needed for that trade or business presently and not for the anticipated future needs.

And again the Treasury Regs go over these tests pretty well.

There is that presumption that this test would be met if, if one, the asset was acquired with funds generated by the US trade or business and two, the income from the asset is retained by that business and, and three, employees or other personnel present in the US are actively involved in the business if they exercise significant management and control over that asset.

So let's go through an example for the Asset Use Test. It will be much easier to kind of just go through this and it's actually an example that that comes directly from the from the Regs we have here.

We have a foreign corporation that is engaged in the in a business in a foreign country that also has a US branch.

The US branch's activities they cause the, the branch's activities itself will cause that foreign corporation to have a US trade or business, the current, during the current year.

The US branch of the foreign corporation it holds large cash balances for business purposes.

The amount of the required cash balance it varies during, due to the fluctuating seasonal nature of the US branch's business.

Next slide continuing on with the facts here. During the current year when the large cash balances are not necessary, that US branch invests the surplus funds in US Treasury bills.

Since the Treasury bills are held to meet the present needs of that trade or business, they are treated as held in a direct relationship to that business.

So accordingly, the interest earned on the Treasury bills for the current year, they would be treated as effectively connected for that year with the conduct of that foreign corporation's US trade or business.

Hopefully that clarifies it a little bit.

So in this case, the interest earned would be considered ECI.

Okay, so that was the asset use test.

So let's discuss the business activities test.

Again, this test is met if the, the activities of the US trade or business were a material factor in the realization of the income.

So this test under the Treasury Regs, they really ordinarily, ordinarily applies to income, gain, or loss, generally of the passive type, that arises directly in the active conduct of a US trade or business.

So here are some examples on this next slide here in which the test is significant.

So situation where you have dividends or interest that are derived by a dealer in stocks or securities. Gains and losses that are derived from the sale or exchange of capital assets in the active conduct of a trade or business by an investment company. Royalties which are derived in the active conduct of a licensing business; or Service fees which are derived in the active conduct of a servicing business.

Another example, let's say salaries and wages earned by NRA employees while working in the US that would constitute ECI.

So let's just say that we have a NRA's only business activity in the US is the performance of personal services.

So income from property, let's say capital gains is realized by the NRA, would be considered ECI only if there's a direct economic relationship between the property and the performance of services.

So an example here, let's just say that maybe they let's just say that we have an individual that that's working here in the US and they have a gain on the sale of an automobile used by that person in in her, his or her. job in the US. That gain on that sale that would be treated as ECI because of the business activities test and you can find again a lot of these examples under the regs under 1.864-4.

Well, I'm going to turn it over to Andy Daxon now and he is going to discuss the other category of US source ECI, Andy. Thanks James and hello everyone.

So James just discussed the first category of US source effectively connected income which, which is FDAP income.

We are now going to discuss the second category which is US source other income.

So under section 864(c)(3), if a foreign person is engaged in the conduct of a US trade or business, all of the foreign person's US source income other than FDAP income is treated as effectively connected income, whether or not that income is directly related to the nonresident alien's US trade or business.

So again for US source FDAP income you need to look at the asset use or business activities test that James just discussed to see if the FDAP income is effectively connected income or not.

In the case of other US source income that is not FDAP, it is automatically treated as effectively connected income if that foreign person is engaged in the conduct of a US trade or business, whether or not it is directly related to that business.

And this is frequently referred to as the limited force of attraction principle, which reflects the idea that once a US trade or business is found to exist, it attracts to it virtually all US source income, whether or not the income it was actually generated by the operations of the US trade or business.

An example of income subject to this rule is income and gain on sales of inventory and other property held for sale to customers in the ordinary course of a business.

So, for example, let's say that a nonresident alien has a fixed place of business in the US and it's engaged in a business of selling electronic equipment in the US.

Based on this activity, the nonresident alien is treated as engaged in a trade or business in the US and the income received from the activity is effectively connected income.

Now let's say that the nonresident alien is also engaged in a second business and in this business is selling wine where the US customers place orders for the wine with the nonresident aliens home office which is in a foreign country.

So title to the wine passes from the nonresident alien's business to the US customer in the US.

Therefore, any gain from the wine sales would be technically US source income.

The nonresident aliens US office for the electronic equipment plays no part in the soliciting or filing, excuse me, filling the orders for the wine.

Even though the nonresident alien's US office has no connection with the wine sales, and even though no selling activities by the nonresident alien for these wine sales takes place in the US, the nonresident alien's income from the sales of the wine in the US is treated as effectively connected income under the force of attraction rule.

And just for future reference, this exact example is found in Treasury Regulation 1.864-4 and it's example 3. And as we are dealing with nonresident aliens with all situations, the first step is to see what the law is per the Internal Revenue Code which we've just reviewed.

The second step is to see if any income tax treaty is applicable to the nonresident alien and the particular tax issue.

In this case, it should be noted that some US bilateral income tax treaties override the Internal Revenue Code provision.

For example, the technical explanation for the US tax treaty with Australia for Article 7, which is the business profits article states that the limited force of attraction rule in section 864(c)(3) of the code does not apply for US tax purposes under the convention and the convention, meaning the tax treaty, which means that again it's under the tax treaty. Okay that takes care of the US source income.

So let's move on to foreign source income as effectively connected income.

So generally foreign source income, including gains and losses is not treated as effectively connected with a foreign person's conduct of a US trade or business.

This rule is consistent with the source based jurisdiction that the US exercises over foreign income of nonresident aliens.

But there are a few exceptions though for certain items of income that are attributable to a US office or fixed place of business and those are covered under sections 864(c)(4) and 864(c)(5)

of the code.

So again foreign source income is not treated as effectively connected income unless the income is attributable to an office or fixed place of business in the US. As shown here on the second bullet on the slide, income is attributable to an office if the office is a material factor in the production of such income and it regularly carries on activities of the type from which the income is derived.

And you can find this under Section 864(c)(5)(B) and Treasury Regulation 1.864-6(b).

The regulations also have some good examples of income being attributable to a US office, so you can refer, refer to those.

So let's review one of these examples, in this example, is example 1 in the regulations.

So in this example, F, a foreign Corporation is engaged in the active conduct of the business of licensing patents that F either purchased or developed in the US. F has a business office in the United States.

Licenses for the use of such patents outside of the US are negotiated by the offices of F that are located outside of the US, subject to the approval by an officer of such corporation located in the US office.

All services which are rendered to F's foreign licensees are performed by employees of F's office located outside of the US.

None of the income gain or loss resulting from the foreign licenses so negotiated by F is attributable to its business office in the US because most of the services rendered the licensees are handled by offices and employees outside of the US.

The question of whether a nonresident alien has a US office depends on the facts and circumstances, particularly on the nature of the taxpayer's, trade or business and the physical facilities actually required by the taxpayer in the ordinary course of the conduct of a trade or business.

And you can see Treasury Regulation 1.864-7(a)(2) for that. A fixed facility including a sales outlet, factory or workshop or mine, may be an office even if the nonresident alien does not use it continuously.

And that can be seen in Treasury Regulation 1.864-7(b)(1).

The Treasury regulations also note that a nonresident alien will not be deemed to have a US office merely because a related person has such, has an office.

In addition, occasionally, the occasional use of a related person's US office will generally not be considered an office attributable to a nonresident alien. And for that you can see Treasury Reg 1.864-7(b)(2) and Treasury Reg 1.864-7(f).

Okay, this slide shows the types of foreign source income that may be treated as effectively connected income under section 864(c)(4)(B).

Only certain types of foreign source income may be treated as effectively connected income.

Those types of income are certain rents and royalties, dividends, interest, gains or losses from inventory type property.

First, let's talk about the rents and royalties.

So rents and royalties are from foreign sources if they are received for the use of or for the privilege of being used outside of the US of intangible personal property, including patents, copyrights and trademarks.

These foreign source rents or royalties would be effectively connected income if they are derived in the active conduct of a US trade or business and are attributable to a US office of that taxpayer.

And you can look at look to Treasury Regulation 1.864-6 for examples of the rents or royalties derived in the active conduct of a US trade or business and are attributable to a US office.

Next, dividends and interest from foreign sources can be effectively connected with a US trade or business only if the taxpayer derives the income in the active conduct of a banking financing or similar business in the US and the taxpayer again has a US office and the income is attributable to that office.

Finally, foreign source income, gain or loss derived from the sale or exchange of inventory property is usually effectively connected income if the sale is made through the taxpayer's US office.

But there is an exception if the property is sold for consumption or disposition outside the US and an office of the taxpayer in a foreign country materially participates in the sale.

Okay, so let's recap the, the foreign source income and effectively connected income concept.

We have section 864(c)(4)(B) that treats foreign source income as effectively connected if certain conditions are met.

First, the taxpayer must be engaged in the US trade or business during the year.

Second, only certain types of foreign source income are subject to section 864(c)(4)(B) and those are the ones listed here on the slide.

Third, the foreign person must have an office or a fixed place of business in the US. And finally, the foreign source income must be attributable to that office or fixed place of business. Yvette, I think it's time for another polling question.

Thank you, Andy.

Audience, here is our 4th polling question.

The question states, If an NRA is engaged in a USTB, is their FDAP income always considered ECI?

Is the answer; A, yes; C, no; C, Since NRA is engaged in a USTB, there is no taxable income issue or; D, NRA cannot be engaged in a USTB.

So take a moment and click the radio button that best answers the question.

If an NRA is engaged in a US trade or business, is their FDAP income always considered effectively connected income?

I'll give you a few more seconds to make your selection.

Okay, We're going to stop the polling now and let's share the correct answer on the next slide.

And the correct response is, B, no.

So let's see how many of you responded correctly.

I see that 54% of you responded correctly.

So Andy, can you clarify?

Sure, no problem, Yvette.

So FDAP income can be either effectively connected income subject to tax at graduated rates or it can be not effectively connected FDAP income subject to statutory, the statutory 30% rate. Generally FDAP is considered non-effectively connected income.

However again if it meets the business activities or the asset use test it can be considered effectively connected income.

So as far as the question it's, the answer correct answer is, no.

FDAP is not, that is FDAP can either be not effectively connected income or effectively connected income depending upon the circumstances.

Hopefully that answers the question.

Audience, I hope that answers your question.

The clarification was necessary and it was a great clarification.

So thank you.

I'm going to send it over back to you Andy with some more information on the effectively connected income.

Thank you, Yvette.

So there may be a situation where a nonresident alien receives a payment that's considered effectively connected income in a year in which the taxpayer is not engaged in a US trade or business.

Section 864(c)(6) goes over the scenario and provides that if payments that would be considered effectively connected income in one year are deferred until a later year when the foreign person is not engaged in a US trade or business, the payments will still be taxed as if they were effectively connected income in the later year.

So this rule covers deferred payments that are income gains.

It also covers gains from the sale or exchange of property or from the the performance of personal services.

Let's run through an example that will hopefully show this concept.

So in this example we have a nonresident alien who performed personal services in the US for a foreign corporation during the last quarter of year 1.

The nonresident alien received $40,000 in compensation for these services that were performed through December 31st of year 1.

The nonresident alien is paid bimonthly and is paid two weeks after the end of the previous bimonthly period.

In the second week of January of year 2, the nonresident alien received the final payment from the foreign corporation of $12,000.

This payment is for the nonresident aliens work completed from December 16th through December 31st of the year 1 as well as the year-end bonus for the work that was done in year 1.

So during year 2 the nonresident alien performs no services at all in the US and does not engage in any other trade or business in the US. Under section 864(c)(6), the $12,000 of income received in year 2, which is the final payment for the services that nonresident alien performed in the US during year 1, is treated as effectively connected income with the US trade or business even though the nonresident alien was not engaged in a US trade of business in year 2.

So basically the determination of whether the nonresident alien's compensation income of $12,000 received in year 2 is effectively connected income or not is made by determining whether the $12,000 of US sourced compensation income would have been effectively connected income or not if it had been received by the nonresident alien in year 1 when the services were actually performed.

Since the $12,000 of income would have been treated as effectively connected income as if it had been received in year 1, the income pertains its character as effectively connected income under section 864(c)(6) when the nonresident alien actually receives the income in year 2.

So now let's talk about how income from the rental of US real property is treated.

Generally, income from the rental of real property located in the US and owned by a foreign person is not considered to be effectively connected income with a US trade or business and therefore it is taxed under section 871(a) as nonbusiness FDAP income at the statutory flat rate of 30% or a lower treaty rate if it's applicable on a gross basis.

That is no deductions are allowed to reduce the gross income that is taxed at the statutory rate.

However, a nonresident alien who owns such real property can elect to have the rental income from the, from the rental of all US real property treated as effectively connected income and taxed at graduated rates even if the nonresident alien has not otherwise engaged in a US trade or business.

So this is, this may be accomplished by making an election under section 871(d). The election is made for the initial year the nonresident alien wants the election to take effect and is accomplished by attaching the required election statement to the tax return for the initial year only and the election continues in effect for all subsequent years and can only be revoked with the consent of the Commissioner of the IRS.

You may refer to the Treasury Regulation 1.871-10 listed on the slide on how and when to make the election and what is required to be in the statement attached to the return.

The principal reason for this election is to benefit from the allowance of deductions such as depreciation, interest, real estate taxes and operating expenses to reduce the gross rental income and have the net rental income taxed at marginal rates, thus avoiding the statutory 30% tax on the gross rents.

A nonresident alien would report the gross rents and claim the allowable rental expenses on Schedule E attached to their Form 1040-NR.

And it's important to note that an election made under this section does not cause a taxpayer to be treated as engaged in the US trade or business for purposes other than to characterize the rental income as effectively connected income and allow deductions to offset the gross rental income.

Okay, so what about gains from the disposition of US real property?

So the Foreign Investment in Real Property Tax Act, which is referred to as FIRPTA, created section 897 of the code which essentially provides that if a foreign person or corporation has gains or losses from the disposition of US real, of a US real property interest, the foreign person is treated as engaged in the conduct of a US trade of business and the gain or loss is effectively connected with such US trade or business.

So basically, FIRPTA treats the gains or losses from the disposition of US real property as effectively connected income and section 861(a)(5) treats that gain or loss as US source.

Therefore, FIRPTA dispositions are taxed as effectively connected income at the appropriate marginal, appropriate tax rates.

We will be holding a future webinar and that will focus on more on the FIRPTA issues, including additional information on what are FIRPTA transactions, the taxation of and the withholding requirements on FIRPTA transactions.

Let's now talk about capital gains and losses from the sale of personal property.

So as we just learned, US real property gains and losses are taxed as effectively connected income with a US trade or business, regardless of whether the individual had made or revoked a real property election or was never in the US.

Well what about the disposition of US personal property? Under section 871(a)(2), capital gains that are not effectively connected with the US trade or business of a nonresident alien who is in the country for 183 days or more is taxable in the US at the flat statutory rate of 30% or a lower treaty rate if applicable.

On the other hand, a US personal, the US personal property gains that are not effectively connected with the US trade of business of a nonresident alien who was in the US for less than 183 days during the year are not taxable to the nonresident alien at all.

However, if the capital gains are effectively connected with the US trade of business, the gains are taxed at normal capital gains rates.

And as James provided earlier in the session, capital gains would be considered effectively connected income if they pass either the asset use or business activities tests.

So let's talk about capital losses now.

So capital losses that are effectively connected with a US trade or business are allowed to be claimed not only against capital gains that are effectively connected to a US trade or business, but if there are any excess capital losses, they are allowed to reduce the total effectively connected income and adjusted gross income of a nonresident alien.

However, the allowable net capital loss is limited based upon their filing status.

The capital gains and losses that are considered effectively connected income would be reported on Schedule D and carried to page 1 of the Form 1040-NR.

If there are capital losses that are not effectively connected to a US trade or business, those capital losses may be used to offset any capital gains that are not effectively connected with the US trade or business.

However, unlike losses that are effectively connected with the US trade or business, non-effectively connected income capital losses in excess of non-effectively connected capital gains are not allowed.

Capital gains and losses not effectively connected with the US trade of business are reported on Schedule NEC, Form 1040-NR and the total tax computed on the Schedule NEC is carried over to page 2 of the Form 1040-NR and is incorporated into the computation of the total tax due.

Okay, so we have covered the various types, character, and sources of income as they relate to nonresident aliens.

We also spent a little time on effectively connected income which is taxable at graduated rates on a net basis.

We discussed that, that net basis means deductions may be taken against the gross income from that type of income.

So what types of deductions are allowed against effectively connected income?

Well, section 873 provides that a nonresident alien can deduct all deductible items that are connected with effectively connected income.

Also, that section provides that there are two classes of deductions for nonresident aliens that are available whether or not they are connected with effectively connected income, and these deductions are, the first one, casualty or theft losses under section 165(c) as long as they the property is located in the United States at the time of the loss and the second one is charitable contributions under section 170.

So again, a nonresident alien can deduct all deductible items that are connected with effectively connected income, but also the proper apportionment and allocation of the deductions must be determined under the Section 861 regulations.

So please, please refer to those, refer to Treasury Regulation 1.861-8.

However, in order for deductions to be allowable, the nonresident alien needs to file a true, accurate, and timely US tax return, and this is stated under Section 874(a) and the related regulations. Under Treasury Reg 1.874-1(b), a nonresident alien individual shall receive the benefit of deductions and credits only if the nonresident alien files a true, accurate, and timely return of the income which is effectively connected with the conduct of a US trade or business. For nonresident aliens and for purposes of this rule, filing timely is filing a return within 16 months after its due date, and that's without extensions as set forth in section 6072 of the Code.

This rule is especially important because IIC frequently deals with many nonresident alien non-filer cases.

So if a nonresident alien files a delinquent return more than 16 months after its original due date, no deductions and certain, and certain credits are allowed.

However, the nonresident alien may request a waiver of the filing deadline under Treasury Regulation 1.874-1(b)(2).

You can refer to those regulations for guidance in case you or a client may want to request the waiver, so deductions may be allowed.

And just a reminder, the actual filing due date for the Form 1040-NR for a nonresident alien is normally June 15th following the close of the calendar year.

However, due date is April 15th, just like for a US person filing a 1040, following the close year, following the close of the calendar year if the nonresident alien received wages that are subject to chapter 24 withholding for that year.

Okay, so we've covered income and deductions.

Now let's go over tax credits.

So nonresident aliens are allowed certain tax credits as long as they meet the requirements for each of the credits.

And these various credits include the foreign tax credit, the credit for child and dependent care expenses, the retirement savings contributions credit, the child tax credit, credit for other dependents and the additional child tax credit, residential energy credit, other credits from Form 3800, which is the general business credits and Form 8801.

It's important to note that tax credits may not offset other taxes that are not imposed on effectively connected income.

We will go over tax credits a little more in a future webinar as part of this webinar series.

Yvette, I think it's time for actually a couple of pulling questions.

I think you're right, Andy.

Audience here is fifth and second to the last polling question.

So there is a light at the end of the tunnel.

Here are the facts.

An IRS agent is examining a nonresident alien who has not filed a tax return. While under exam more than 16 months after the due date, the NRA submits a form 1040-NR to the agent with legitimate expenses related to NRA's schedule C business for year under exam.

Does the IRS agent allow the expenses?

So select the response that best answers whether the IRS agent should allow the expenses, A, yes; B, no; C, maybe; or D, the NRA cannot submit a Form 1040-NR to the agent.

So take a moment and click the radio button that best answers the question.

Should the IRS agent allow the expenses?

So I'll give you a few more seconds to make your selection.

Okay, We're going to stop the polling now and let's share the correct answer on the next slide.

And the correct response is, C, maybe. Let's see how many of you responded correctly.

Uh, oh, I see that 23% of you responded correctly.

So I think we're going to need some clarification on this.

That's no problem, Yvette.

So the answer to this one is maybe because following 874(a)

and the related regulations that they provide that if a nonresident alien files a return more than 16 months after the due date, no deductions and certain credits are allowed.

So from the the agent's perspective that, the law is pretty clear. The return was not was not timely filed per section 874 and the related regs.

So the deductions are not allowed.

However, the regulations also provide that a nonresident alien may request a waiver of the timelines which is the 16 months and if they meet the requirement within that waiver then the agent would allow the expenses or deductions and credits against the effectively connected income.

So that is why the answer is maybe because initially the law says they are not allowed.

However, the law allows the nonresident alien to request a waiver and the procedures for that are pretty clear in 1.874-1(b)(2) that provides exactly what information needs to be provided by the nonresident alien to meet the requirement to have them waived.

So hopefully that explains why the answer is maybe. Andy, it did, wonderful job.

Thank you so much for the clarifications.

Now let's look at our our final polling question.

Let's see here audience.

Here is the last polling question.

So that's the option that best completes the statement.

If a nonresident alien receives wages subject to withholding, they must file an income tax return by the BLANK of the following year.

So when do they need to do it?

Is it, A, June 15th; B, April 15th; C, March 15th; or D, none of the above.

So take a moment and click the radio button that best answers the question or completes the statement.

If a nonresident alien receives wages subject to withholding, they must file an income tax return by when? Is it June 15th, April 15th, March 15th, or none of the above.

So I'll give you a few more seconds to make your selection.

Okay, we're going to stop the polling now and let's share the correct answer on the next slide.

And the correct response is, B, April 15th.

So let's see how many of you responded correctly.

71% of you.

So Andy, one more clarification for us.

That's no problem, Yvette.

So the general rule for filing for a nonresident alien is to file their 1040-NR, is to file it by June 15th of the following calendar, is the June 15th of the following calendar year.

That's the general rule.

However, if the nonresident alien was paid wages and those wages were, they were withheld upon in Chapter 24, which are just the normal withholding rules for wages, then the, the date they have to file is April 15th.

So hopefully that clarifies it.

Okay Andy.

Thank you all again for listening and participating.

Andy, I believe you have some resources that you'd like to share with our audience.

Yes, I do Yvette.

So what we have here on the slide are some additional resources that you can access and these include the the Publication 515 which is the Withholding of Tax on Nonresident Aliens and Foreign Entities, Publications 519 which is the US Tax Guide for Aliens.

Also IRS.gov has the International Taxpayer webpages that include the FIRPTA withholding as well as other topics related to taxation and withholding on nonresident aliens.

Also on the IRS.gov site, we have Practice Units related to issues surrounding nonresident aliens.

So these are actually some, some good resources to use if you have questions.

And again, the IRS.gov website actually has some really good information on it on the international taxpayer webpages.

So, Yvette, I think that's all we have.

And I'll turn it back over to you, Yvette.

Thank you, Andy.

Hello again.

It's me, Yvette Brooke-Williams, and I'm going to moderate the Q&A session.

But before we start the Q&A session, I want to thank everyone for attending today's presentation, Taxation of Nonresident Alien Individuals.

Now earlier I mentioned that we want to know what questions you have for our presenters.

So here is your opportunity.

If you haven't input your questions, there's still time.

So go ahead and click on the drop down arrow next to the Ask Question field.

Type in your question and click Send.

James and Andy are going to stay on with us to answer those questions.

So one thing before we start, we may not have time to answer all of the questions submitted, but we'll answer as many as time allows.

So let's get started so we can get to as many questions as possible.

So we're going to start this out with James since Andy has been talking and probably needs to get just a little sip of water.

So James, can you please elaborate more on why interest income earned from a US savings bank account is not subject to income tax for a nonresident alien. Okay, okay.

So the question again to elaborate is, why interest income earned from US banks are not subject to income tax for an NRA, yeah, this was mentioned a few times actually and it's actually under the code.

We did mention in our nontaxable nonbusiness FDAP income slide there, there's a slide on that and that basically states that NRAs that receive US source portfolio interest and that would be interest from US banks or any similar institutions.

They are exempt from taxation under the code and it's under 871(h) on this type of interest income.

And again this interest income cannot be considered ECI.

So as long as this interest income doesn't pass that asset use test or the business activities test.

Then it would be considered nontaxable in this case.

So since this type of interest income is nontaxable under the code, you don't have to report that.

An NRA would not have to report that on their 1040-NR and a NRA may still receive a 1099-INT from the bank. But it does not have to be reported since it's a nontaxable item.

And then I do want to note actually that we are going to, going into reportable items in general and the preparation of a 1040-NR in, in an upcoming webinar.

And right now I think we have it slated for the end of September.

So for those of you that are interested in seeing or, or participating in, in a session that goes through an actual 1040-NR preparation example, please look out for that class.

Hopefully that answers the question.

Thank you so much, James.

Andy, I hope you've gotten your glass of water and you're ready for us.

I have.

You did good.

A nonresident alien is the 100% shareholder of a US corporation located in the United States.

The nonresident aliens does not have any income from the C-corp.

Does the nonresident alien have to file a Form 1040-NR?

So if I heard right, we essentially have a nonresident alien that's, that's the share only, sole shareholder of a corporation and whether they have a US filing requirement.

So the, the general rules again are that if, if the individual has effectively a US trade or business or if the individual has non-effectively connected FDAP income that's not withheld upon correctly that in other words the, the withholding doesn't cover the, the correct amount of tax then, then the nonresident alien has a US filing requirement.

In this specific situation, if there were no dividends or compensation or wages paid out of the corporation to the individual and it was just the individual held the stock in the company then and there's no other FDAP income or no other effectively and they weren't in any other US trade or business, then I believe the answer to this question is no, they wouldn't have a following requirement for the Form 1040-NR.

Thank you so much.

Back to you James. A Canadian citizen and resident who spends winters in California is a commissioned travel agent working for a Canadian travel agency.

Are commissions earned while in California taxable to the US, I'm sorry, taxable in the US, in the US, right.

Okay. Okay.

So just to confirm, we have an NRA that's working in the US earning commissions and the question is whether or not those commissions earned while in the US are taxable?

Yeah, it's just basically you have to look at the source of income rules under 861 through 865 and that says and we mentioned this actually many times in the, in the slide deck as well.

So this is probably the easiest one to answer.

So income earned from the performance of personal services is based on where the NRA works.

So in this case, if this NRA worked in I think was California, any commissions earned while working in the, in California that would be taxable to that individual as US source income.

Again, since they're performing services in the US, they're considered a US trade or business.

They're working in the US so you, so you pass multiple tests here, US source because they're working in the US and they're in a US trade or business because they are performing services in the US. So therefore that income would be considered ECI and it would be taxable on their Form 1040-NR.

I did mention also there's that de minimis rule exception.

So if, if this individual falls under that de minimis rule, they have to work for a foreign, a foreign employer.

In this case, I believe that it was mentioned there was a Canadian travel agency.

So there's a foreign employer. They have to also be in the, the US for no more than 90 days.

And then also if the commissions were less than $3,000 then in this case actually it would fall after that exception.

Thank you James.

Back to you Andy. Is a US real estate sold by a nonresident alien FDAP income?

So I'm sorry, I was thinking this, this is.

I can see the, where the confusion might lie in this one.

So the answer is no.

So as mentioned in the, during the lesson today the FIRPTA created at section 897 which essentially says that the disposition of a US real property interest which includes real estate. US real estate is considered effectively connected income.

So no, that the the sale of real estate is, is considered effectively connected income and and would be taxed as such.

I think the, the confusion lies with where we discussed the election under 871-D which allows a nonresident alien to make an election to treat the income, the rental income as effectively connected income because normally rental income is not effectively connected for that income.

So I, I kind of see where you can get the the two confused but know that the actual sale of the property is effectively connected income due to the FIRPTA rules. And on the income side for the rental generally it is not effectively connected FDAP income unless a nonresident alien makes the election to treat it as effectively connected income.

So I hope, hopefully that explains it. That was a perfect, perfect explanation.

Thank you Andy.

James, back to you.

I'm a nonresident alien who received a signing bonus this year in 2023 for accepting a job offer to work in the United States with the starting date of 2024.

They're going to start in February of 2024.

Is the sign up bonus effectively connected income and taxable in the year 2023 for the nonresident alien?

Okay.

That was that was a long one.

So we have a NRA, I wrote this down, I was writing down really quickly.

So we have a NRA that receives a bonus in a year, in a given year and for accepting a job to work in the US immediately beginning next year in February, would that bonus be considered ECI and taxable.

So this, yeah, this is actually related to one of the slides that I think Andy had covered and that's for ECI receiving, or ECI in years, not engaging in a US trade or business.

So since that, since in this case the performance of personal services is considered US trade or business again and in this case this individual is going to be working in the US and being paid for that. The payment of the wage income that they receive in, receiving 2023 that would be considered wages and that's, and that would be required to be reported on a 1040-NR.

So the the NRA would have to recognize the income in that year received.

Hopefully that answers the question and I hope they got that question. Right.

Yep.

Thank you so much.

Andy, can a nonresident alien having a rental property in the US and claim the usual rental deductions like property tax?

Okay.

So this is somewhat related to the the prior question in a way or at least that the answer to the prior question.

So it depends on the facts and circumstances.

As mentioned in the, in the lesson, rental income is generally considered non-effectively connected FDAP income and it's subject to statutory rate of 30% unless a lesser treaty rate is available to an individual.

So the answer to that initially is it's non-effectively connected FDAP income.

However, as mentioned previously, nonresident aliens may elect under section 871(d) to treat all their rental income from US real property as effectively connected income, which would allow them to offset the rental income by allowable deductions and then to be taxed on the net rental income at marginal rates just like US persons are.

So hopefully that answers the question.

Thank you Andy. James, Does a nonresident alien who does not live in the United States have to pay US federal income taxes on the social security that she received based on her benefits as a surviving spouse?

Her husband was a US citizen. Okay.

So a NRA that that does not live in the US received Social Security benefits as a surviving spouse and those benefits were earned when her husband was a US citizen.

Actually, you know, this is actually a pretty good question to share this has come up a couple times.

So yeah, generally, yes, Social Security payments they are.

And and Andy, correct me if I'm wrong on this because I'm a little rusty on this.

I know that Andy, you know is good with treaty stuff, as well.

So Social Security benefit payments are generally considered FDAP income and I think it's like 85% of the amount of Social Security benefit paid to NRAs, they are subject to a 30% withholding.

However, NRAs also could be exempt from this tax if they're, if they are eligible to claim a treaty benefit.

So I believe that there are some treaties out there that the United States have entered with countries in which the, the Social Security benefits article in which any payments made by the Social Security Administration to a residence of the other country that would be only taxable in the US.

However, there are some tax treaties that provides that residents of these countries would be exempt in this case or an actual reduced rate.

So does the answer that question? Generally, yes.

And there is that mandatory 30% withholding.

However there could be a treaty article that, that may exempt that income from that tax and and again I don't know any of the countries offhand, but there are some that are out there and hopefully that answers that question Okay.

Thanks James.

So Andy, since James just mentioned treaties, does the IRS have treaties with other countries?

And if yes, do you know where?

Yes, the IRS does have bilateral tax treaties with many countries, I believe through the end of this year.

I think there's 66 out there.

I believe as of January of 2024, I believe the treaty with Hungary might go away, but don't quote me on that.

But yes, we have many, many treaties.

The treaties may be found on IRS.gov, on the, on the website.

Publication 901 I know has some information on it, and also I believe it's on the IRS.gov web page.

There's treaties A-Z, which lists all of the treaties as well as amendments to the treaties through the, through the life of the treaty.

So that that's a good place to go to if you want to look at a particular treaty.

So the answer to the question is yes, we have many treaties and and there's several places to go to find them, including the IRS.gov website.

OK, thank you, Andy.

Alright, let's see.

James a nonresident alien worked in the United States last year but returned to his home country and continued working remotely outside of the US.

The nonresident alien has connected to the US company secure, he has to connect to the US company secured network to perform his work virtually.

Is the nonresident alien deemed to have a fixed place of business or office in the US and has to treat the income earned while working abroad as effectively connected income attributable to such fixed place or office or is this foreign source income not subject to US tax.

So let me know if you need me to repeat any of that.

It is a lot.

James, you there?

Sorry about it.

I'm on mute.

Sorry.

Can repeat the last, the, the last part about the fixed place of business?

I just want to make sure I got that right.

All right.

He says here he's connected to the company's secured network to perform that work virtually.

Is the nonresident alien deemed to have a fixed place of business or office in the US and then would have to treat the income earned while working abroad as effectively connected income attributable to such a fixed place?

OK, yeah I did.

The question basically is does the NRA using a network, the secured network to perform work virtually?

Does that cause the NRA to have a fixed place of business in the US and therefore have that income, you know, considered the foreign source income that would be considered that would be taxed as ECI in the tax year.

And those rare situations the fact that the NRA employer's physical location in the US and that employees needs to connect to that employer's networks to perform his work in his, in that, in that home country.

That does not mean that the NRA employee has a fixed place of business in the US, to have the foreign source income treated as ECI.

That I think I believe that Andy had talked about under 864(c)(4)(B)

that we covered. Those explains the special rules that would apply to the foreign sources.

The following types of ECI that would be considered foreign source and taxable in this case.

But merely just having to connect to a network, to a network connection would not cause that, that NRA to have a fixed place of business and therefore it would not be considered ECI in this case.

All right audience, I'm sorry, but that is all the time we have for questions.

I want to thank our presenters for sharing their knowledge and their expertise and for answering your questions.

But before we close the Q&A session, Andy, can you share some key points you want the attendees to remember from today's webinar?

Sure Yvette.

So finally to the summary and the key points.

First, generally nonresident aliens are taxed only under US source FDAP income and effectively connected income from a US trade or business.

Second, general sourcing rules can be found in the code in sections 861 through 865.

Third, US source FDAP income is generally taxed at the statutory rate of 30% unless a lesser rate per code or per treaty is more applicable.

Forth, effectively connected income is taxed on a net basis at marginal rates and again a net basis is allowing deductions to offset the gross income.

Fifth, US source FDAP income may or may not be effectively connected income depending upon the facts and circumstances.

And finally, nonresident aliens have to file true, accurate and remember timely returns to be allowed deductions.

Yvette, I will now turn it back over to you to do the final wrap up.

Thanks again Andy. Audience, we are planning additional webinars throughout the year.

To register for an upcoming webinar.

Please visit IRS.gov, Keyword Search, Webinars, and select the Webinars for Tax Practitioners or Webinars for Small Businesses.

When appropriate, we will be offering Certificates and CE credit for upcoming webinars.

And as a matter of fact, the webinar that we're going to have on September the 26th of 2023 will walk you, walk you through how to complete Form 1040-NR.

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