Form 8858 (Rev. December 2018) – 2018 Tax Year Checklist
Purpose
Form 8858 reports financial and tax information for Foreign Disregarded Entity operations and Foreign Branches under regulations incorporating changes from the Tax Cuts and Jobs Act of 2017. The December 2018 revision addresses new reporting requirements under Section 59A of the base erosion and anti-abuse tax provisions, effective for tax years beginning after December 31, 2017. These requirements require US taxpayers to disclose base erosion payments and tax benefits involving related foreign persons through comprehensive schedules.
The form satisfies reporting requirements under Sections 6011, 6012, and 6031, as well as those mandated by Treasury Regulations for U.S. filers of foreign business entity structures. IRS Form 8858 must accompany Form 1040, Form 5471 for owners of Controlled Foreign Corporations, or Form 8865 for foreign partnership interests, ensuring compliance with U.S. international tax reporting requirements established by the Internal Revenue Service for cross-border financial activities and Trade or Business operations abroad.
Filing Steps
Step 1: Verify Filing Requirements and Deadlines
Confirm that the filer qualifies as a U.S. person with a foreign disregarded entity or foreign branch under the Treasury. Reg. 1.367(a)-6T and qualified business units definitions per Treas. Reg. 1.989(a)-1(b)(2)(ii). The filing deadline aligns with the filer’s tax year, rather than the disregarded entity's accounting period. It is accompanied by Form 8858 attached to a timely filed U.S. federal income tax return that matches the filer’s tax purposes reporting dates.
Step 2: Complete Header Information
Enter the filer’s name, Employer Identification Numbers or Social Security Number, street address, and Tax Year dates in spaces at the top of page one. Separately enter the Foreign Disregarded Entity or foreign branch annual accounting period dates below the form title, noting these dates may differ from the US person filer’s taxable year.
Step 3: Identify Foreign Disregarded Entity or Foreign Branch
Provide the name, address, US identifying number, if any, and Reference ID number for the disregarded entity or branch as instructed by IRS forms guidelines. State the foreign country or countries of organization, entity type under local tax laws, dates of organization, effective date as Foreign Disregarded Entity, principal business activity country, and activity type.
Step 4: Report Treaty Benefits
If benefits under the US tax treaty were claimed on Foreign Disregarded Entity or foreign branch income, enter the specific treaty name and article number. Identify the income and profits article of the applicable bilateral agreement between the United States and the relevant foreign country for tax credits purposes.
Step 5: Declare Functional Currency
Declare the functional currency of the Foreign Disregarded Entity or foreign branch per Section 989 and Section 987 requirements, which may be US dollars or foreign currency. If using foreign currency-denominated investments or foreign securities accounting, check the box when applying section 989(b) average exchange rate for translation from the Mexican Peso, Canadian dollar, or other foreign currency.
Step 6: Provide Ownership and Custodian Information
Identify the US branch office or agent information if applicable, the person with custody of books and records, including their location, and tax owner details if different from the filer. Provide direct owner information, including foreign country of organization and functional currency, when the direct owner differs from the tax owner in complex Foreign Disregarded Entity structures.
Step 7: Attach Organizational Chart
Attach the required organizational chart identifying all entities in the ownership chain from the tax owner through the Foreign Disregarded Entity or foreign branch to any entity with ten percent or more interest. The chart must show the name, placement in the ownership structure, ownership percentage, tax classification under Section 6038 standards, and the foreign country of organization for each entity, including resident aliens and green Card Holders.
Step 8: Complete Schedule C Income Statement
Report all amounts in functional currency on Schedule C and translate to US dollars using generally accepted accounting principles, translation rules, or section 989(b) average exchange rate. Include gross receipts, cost of goods sold, dividend and interest income, rental property income, active rents, foreign currency gains or losses, and total income on income statements, with income tax expense reported separately from total deductions.
Step 9: Complete Schedule C-1 Section 987 Information
Report remittances from the foreign disregarded entity or foreign branch in both the functional currency of the entity and the functional currency of the recipient, as per Section 987 regulations. Report section 987 gains or losses recognized and deferred under Treasury Regulations section 1.987-12T, answering whether all remittances were made to the direct owner and whether the method of accounting changed.
Step 10: Prepare Schedule F Balance Sheet
Enter cash, current assets, and other assets at the beginning and end of the annual accounting period on the Balance Sheet schedule. Enter liabilities and owner’s equity to balance total assets with total liabilities and equity, reporting all amounts in US dollars in accordance with generally accepted accounting principles.
Step 11: Answer Schedule G Questions
Answer all questions in Schedule G covering thirteen main question sections with multiple sub-parts addressing ownership interests, foreign taxes, section 901(m) disqualifications for covered asset acquisitions, section 909 suspended tax amounts, and base erosion payments. Lines 6 and 7 require disclosure of base erosion payments and tax benefits under Section 59A involving related foreign persons, which requires FDE owners to enter total amounts in dollars.
Step 12: Complete Schedule H for Corporate Filers
Complete Schedule H only if the tax owner of the foreign branch or Foreign Disregarded Entity interest is a US corporation under Treasury Regulations section 1.1503(d)-1(b)(4). Answer whether the separate unit has dual consolidated loss, provide amounts and attributed net income if part of a combined separate unit, describe permitted domestic use with attached documentation, and report triggering events requiring recapture.
2018 Year-Specific Updates
Section 59A Base Erosion and Anti-Abuse Tax Reporting
Schedule G lines 6 and 7 were added for the 2018 revision, requiring disclosure of base erosion payments and tax benefits under sections 59A(d) and 59A©(2) for tax years beginning after December 31, 2017. Filers must identify and quantify amounts involving related foreign persons when the applicable taxpayer has average annual gross receipts of at least five hundred million dollars for the three-taxable-year period ending with the preceding taxable year and maintains a base erosion percentage of three percent or higher.
The base erosion and anti-abuse tax provisions represent international tax provisions enacted through the Tax Cuts and Jobs Act to prevent profit shifting through deductible payments to foreign related parties. US taxpayers subject to these rules must complete additional Schedule G questions and provide dollar amounts for base erosion payments received or paid by the Foreign Disregarded Entity or foreign branch to related foreign persons.
Functional Currency Translation and DASTM Rules
Schedule C includes a checkbox for entities using the Section 989(b) average exchange rate method for translating foreign currency-denominated investments and foreign securities into US dollars, as required by Section 989. Schedule H adds DASTM gain or loss reporting on line 5 with translation at the average exchange rate per section 989(b) regulations, requiring filers using the Dollar Amount Spot Translation Method to follow exception instructions.
The Corporate Bond Monthly Yield Curve and Treasury Securities Exchange Rate Tables, published by the Internal Revenue Service, provide reference rates for functional currency translation across multiple foreign currencies. The exchange rate used must be reported using the divide-by convention, rounded to at least four decimal places, and expressed in foreign currency units equal to one US dollar.
Section 901(m) Foreign Tax Credit Limitations
Schedule G line 4 requires filers to report whether the Foreign Disregarded Entity or foreign branch paid or accrued any foreign taxes disqualified for foreign tax credits under section 901(m) enacted in 2010. Section 901(m) of the Education Jobs and Medicaid Assistance Act applies to covered asset acquisitions where a basis step-up occurs for U.S. tax purposes without a corresponding foreign tax basis adjustment, unrelated to the section 59A base erosion provisions.
The foreign tax credit basket limitations under section 901(m) affect qualified business units and foreign corporation acquisitions involving resident aliens, green Card Holders, and domestic corporations acquiring foreign property manager entities or Canadian ULC structures. Filers must distinguish section 901(m) disqualifications from section 909 suspended foreign taxes and section 902 deemed paid credits in separate reporting categories.
New Schedule I and Schedule J Requirements
Schedule I Transferred Loss Amount relates to section 91 enacted by the Tax Cuts and Jobs Act, section 14102, for domestic corporations transferring all foreign branch assets substantially to a specified ten-percent-owned foreign corporation. Schedule J, Income Taxes Paid or Accrued, requires detailed reporting of foreign income taxes by separate category, including a foreign branch category, a passive income category, and a general category for foreign tax credit purposes.
Schedule M Expanded Filing Requirement
Schedule M transactions between a foreign disregarded entity or a foreign branch and the filer or other related entities are now required with each Form 8858 for both structures, regardless of the tax owner. The expansion addresses concerns in Notice 2017-10 and Proposed Regulations 112096-22 regarding related party transactions, incorporating guidance from Revenue Procedure 2022-39 and Revenue Rule 2022-22 for comprehensive disclosure of financial activities and material transactions.
Criminal Penalties under sections 7203, 7206, and 7207 may apply for failure to file information required by section 6038, with a ten-thousand-dollar penalty imposed for each annual accounting period. Additional penalties under Notice 2022-60 and Notice 2022-62 address syndicated conservation easement transactions and Payroll fraud schemes involving foreign disregarded entity structures, which require enhanced document analysis and investigation software capabilities.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
