Form 1040 NR - How to exempt schedule C income from tax due to treaty.

[freshy70]

I'm filing a Form 1040-NR for an Australian citizen. Their effectively connected U.S. business income is exempt from tax due to the U.S. Australia tax treaty Article 7 - they have no permanent establishment in the U.S. How to I make it so the form 1040 NR exempts the business income from tax?

[itonewbie]

Sch C, F.1040NR, Article 7 of US-Australia DTA...

How is the business structured that the income should otherwise be reported on Sch C but exempt under Article 7?

[freshy70]

It's a single-member LLC.

[itonewbie]

SMLLC set up in the US?  What role does that LLC play?  How was the income derived?  What activities were involved?

[freshy70]

SMLLC registered in Wyoming. LLC is the business entity that sells on Amazon.com. The only activity involved in owner shipping inventory to Amazon FBA warehouses in the U.S. and then orders of goods were fulfilled to customers by Amazon.

[itonewbie]

Assuming your client meets the conditions of Article 7, you'd disclose the treaty exemption under Miscellaneous Forms > Treaty-Based Rtn. (8833).  Prima facie, your client should also be required to file a proforma 1120 and 5472 for the SMLLC.

As you may already be aware, there may still be income/sales tax liabilities at the state level.

[freshy70]

I actually found that form 8833 and completed it based on some extensive reading. What I'm stumped about is that completing that form doesn't change anything about the tax liability. I assumed that completing that form, checking a box, or entering a number somewhere would create an offset on the schedule c net income resulting in a zero tax liability. That doesn't seem to be the case. 

There is a place to enter total income exempted by treaty (line 1 c 1040-NR), but that only offsets lines 1 a and b. 

I'm wondering if since she is exempt based on my interpretation of the treaty article 7, that I just file proforma 1120 and 5472 and skip the 1040-NR with schedule C.

BTW there seems to be differing opinions on whether Amazon sellers are exempt based on an Amazon warehouse not being a "permanent establishment" of their business. I'm agreeing with most opinions that they are exempt.

I was aware of sales tax. I was not aware of any state income tax. 

[itonewbie]

F.8833 is only a disclosure for substantiating the treaty position your client takes on the return.  Nothing from that form is supposed to flow to any line on the return.

Line 1c is where the exempt amount should be reported and that comes from Sch OI, Item L.

Since the SMLLC is a DRE, your client should still file a F.1040NR.

The answer you need is right there in Article 5.

[freshy70]

Thanks for all your help. As you can see an entry on line 1 does nothing to reduce taxable income from schedule C.

[itonewbie]

That's because Item L is information.  Amounts reported there are not meant to affect calculations on the return.

[freshy70]

So it sounds like the return will always show tax due, but if the amount that is tax exempt is equal to taxable income, the IRS will not expect a payment of the tax due.

[itonewbie]

No.  That's the whole purpose of the treaty exemption and the disclosure of that position, so that the income doesn't get included as taxable income.

[freshy70]

Ok got it. Then I just file the 1040-NR with the treaty disclosure and since the income is tax example, the schedule C should include no income or expense.