Understanding Loans and Expense Payments as a Foreign-Owned Business

As a foreign-owned business, this is what you need to know before loaning money to a business. Explore the tax form required and possible consequences.

Why do you need to file a Form 5472?

The IRS uses Form 5472 to keep track of foreign-owned U.S. businesses to be sure they are paying the correct amount of U.S. taxes. The form is also used to prevent tax fraud by unallotted monies. In cases such as these, when making loans and payments to another company it is required to be filed at the end of the year.

Are there tax consequences from making a loan or advance to a business?

When considering loan tax consequences, the short answer is — no. There is no immediate consequence from a tax standpoint. A time when you may see a consequence is if Form 5472 has not been filed by the deadline. In that case, the IRS will automatically send out a $25,000 per form penalty for not filing in time.

The initial penalty is $25,000 for the first year. If you have not responded to the IRS notice within 30 days, another $25,000 penalty will be fined to you. Until resolved, fines continue to build, costing you and your business serious financial strain.

For example: You paid expenses on behalf of the company or loaned the company a sum of $5,000. These monies are then spent by the company and reflected on the corporate return. At a later date, there are excess funds that can be distributed back to you.
On this distribution there are three possible outcomes:

1. Paid as a repayment of the loan which would not be taxable or income to you
2. A wage or consulting fee which are tax deductible to the corporation and income to you
3. A dividend which is taxable to you and not tax deductible.

Things to keep in mind

Be sure that when making payments or loans to another business you keep clear records. This should be in writing and include any interest rates, repayment terms, payment schedules, and terms of the transaction.

Ensure that before making any agreements the terms and rates are similar to what other related businesses are contracting. If your business is audited, the IRS will want to check that the transaction between businesses is adequate. Always verify other parties before making any transactions whether large or small.