What Form 8858 Is For
IRS Form 8858 (2018) is an information return used to report income and activities from a foreign disregarded entity (FDE) or foreign branch (FB). Its purpose is to help the IRS track U.S. taxpayers’ business operations in a foreign country, ensuring transparency and accurate taxation.
A foreign disregarded entity is a business, such as a single-member foreign LLC, that the IRS treats as part of its owner rather than a separate legal entity. A foreign branch refers to an overseas branch office or extension of a U.S. business. Together, these rules prevent taxpayers from concealing income earned through foreign entities or branches.
When You’d Use Form 8858
You need to file IRS Form 8858 (2018) when you are a U.S. taxpayer who owns or operates a business outside the country through either of the following:
- Foreign Disregarded Entity (FDE)—A business, such as a single-member foreign LLC, that is not treated as a separate legal entity for U.S. tax purposes.
- Foreign Branch (FB)—A branch office or extension of a U.S. company conducting business in a foreign country.
File Form 8858 with your annual tax return (Form 1040, 1120, 5471, or 8865) by the same due date, including extensions. You must also file if correcting prior tax years, updating foreign tax details, or adding missing schedules. Timely filing maintains IRS compliance and helps prevent penalties for late or incomplete submissions.
Key Rules or Details for 2018
The 2018 tax year introduced significant updates to IRS Form 8858 (2018) under the Tax Cuts and Jobs Act (TCJA). These changes expanded the form’s reporting requirements and affected both foreign disregarded entities (FDEs) and foreign branches (FBs) operating in a foreign country.
Key 2018 Updates
- Foreign Branch Reporting: All foreign branches became subject to filing, not just disregarded entities. Even small branch offices were required to report their income and expenses.
- New Schedules:
- Schedule I — This schedule reports transferred loss amounts under Section 91.
- Schedule J — This schedule covers foreign income taxes that were paid or accrued.
- Schedule M — This schedule became mandatory for all filers and details transactions between the entity, the filer, and related parties.
- Schedule I — This schedule reports transferred loss amounts under Section 91.
- Separate Filing: A distinct Form 8858 must be filed for each foreign entity or branch owned directly or indirectly.
- Exchange Rate Rule: All amounts must use the IRS “divide-by” convention (foreign currency per U.S. dollar).
These revisions strengthened IRS oversight of international business activities, ensuring consistency and transparency in cross-border reporting.
Step-by-Step (High Level)
- Confirm you must file: Check whether you have direct or indirect ownership of an FDE or foreign branch, including subsidiaries or controlled foreign corporations, and whether you’re filing as a corporation, partnership, or estate (i.e., the individuals required to report).
- Identify the tax owner and currency: Determine the tax owner with respect to the entity, the functional currency, and any defined scope that makes you eligible (or limited) to file for the tax year.
- Create identifiers and an org chart: Create a reference ID if no EIN exists and map entities, deals, and intercompany links.
- Gather financial data: Collect revenue, expenses, profit, payments, interest, loans, and bank details; these feed Schedule C and other schedules. Include trade and services activity.
- Apply the rules: Follow IRS regulations and any other relevant regulations that impact your reporting.
- Complete the form: Finish core schedules, then complete related-party reporting. If filing on behalf of another filer, attach the form to the correct return.
- File correctly: Submit by the due date via e-file or paper, and watch for any IRS notice.
- Handle all exceptions: If unusual circumstances arise (e.g., dormancy), document factors and note any exceptions.
- Know the stakes: Inaccurate filing can result in penalties, including criminal penalties in severe cases involving false statements or the concealment of money.
Common Mistakes and How to Avoid Them
Filing IRS Form 8858 (2018) can be confusing, especially for persons managing multiple entities or accounts abroad. Below are common mistakes and how to prevent them.
- Forgetting to File: Many U.S. citizens overlook their duty to report income from a foreign branch or disregarded entity. Always confirm filing obligations before submitting your tax return.
- Incomplete Information: Omitting details such as an account number, property data, or foreign income reduces accuracy. Double-check all financial entries.
- Incorrect Deductions: Taking unverified deductions or converting currencies incorrectly can cause issues later. Use IRS rates for the correct tax year.
- Using Wrong Data Sources: Don’t rely on unverified online brokers, clients, or third-party templates. Always use the official IRS form.
- Misreporting Employee or Business Details: If an employee or local market representative handles part of your operations, clearly list them as part of your business structure.
These errors can be easily avoided with careful review and documentation throughout the filing process.
What Happens After You File
After you submit IRS Form 8858 (2018) with your annual tax return, the IRS processes it as part of your complete filing package. Because it is an information return, the form does not calculate tax owed but instead supports your income and expense reporting for each foreign branch or foreign disregarded entity. The IRS uses this information to confirm that foreign activity aligns with what you reported elsewhere on your return.
Once reviewed, the IRS may compare your data with other forms, such as 5471 and 8865, to ensure accuracy. If the IRS identifies errors or missing details, it will notify you and provide you with 90 days to rectify the issue. Always keep records for at least three years in case of audit or penalty review.
FAQs
Do I need to file Form 8858 if my foreign disregarded entity had no income during the tax year?
Yes, you must still file the information return even if your foreign disregarded entity had no income, expenses, or activity. The filing requirement is based on ownership, not profitability.
How do I know if my business qualifies as a foreign branch?
A foreign branch exists when a U.S. business operates through an office or fixed place of business in a country other than the United States. If you manage ongoing trade or services abroad, you likely have a branch that requires Form 8858 filing.
What happens if I report the wrong tax year on Form 8858?
Using an incorrect tax year can cause discrepancies between your tax return and the IRS database. Always match the Form 8858 reporting period with your main filing to avoid penalties or delays.
Do I need a separate Form 8858 for each foreign entity I own?
Yes, a separate form is required for every foreign entity or foreign branch you own directly or indirectly. Each must include its own financial and ownership details.
What is Schedule C on Form 8858 used for?
Schedule C summarizes the foreign entity’s income statement in its functional currency and translates it into U.S. dollars. It helps the IRS understand the financial performance of each reported operation.
