Conducting Business In the U.S.
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Nonresident Aliens Conducting Business In the U.S.
The term "trade or business within the United States" is not fully defined in the Code or Treasury regulations, and the IRS will not provide an advanced ruling on whether a taxpayer is engaged in a U.S. trade or business (USTB). Generally, whether or not a person is engaged in a USTB is determined based on the facts and circumstances of each case.
To be engaged in a trade or business, a taxpayer (either directly or through a dependent agent) must be involved in an activity that is considerable, continuous, and regular, and the taxpayer's primary purpose for engaging in the activity must be for income or profit.
Do You Need To Be In the U.S. to be Engaged In a U.S. Trade or Business?
There is nothing that tells us that physical presence is a requisite, so, you could be engaged in a U.S. trade or business without ever setting foot in the United States. For example, income from the sale of inventory items purchased outside the U.S. and sold within the U.S. is U.S.-sourced income under IRC Section 861(a)(6). Additionally, under IRC Section 872(a), the gross income of a nonresident alien includes U.S. source income, whether or not it is income effectively connected with a U.S. trade or business.
Tax Regulations for Nonresident Alien LLC Owners Regarding the Sale of Inventory
If the U.S. sale of inventory is not treated as U.S. business income, it must be shown as not effectively connected income (NEC). NEC income is taxed at a flat rate of 30% of gross with no offset for deductions. It is better to assume that such income is connected with a U.S. trade or business.
Income from sources within the United States that is considered effectively connected with your trade or business is taxed at graduated rates (IRC Sec. 864(c)(3)). Income from sources outside the United States is treated as effectively connected to your U.S. business only if you have an office or other fixed place of business within the United States (IRC Sec. 864(c)(4)).
As mentioned above under The Role of Tax Treaties, an exemption from taxation of U.S.-sourced business income might apply under the U.S. tax treaty with your home country, if your business does not have a permanent establishment in the United States.
Purchased Inventory
According to the Internal Revenue Manual, the source of income realized from the purchase and sale of inventory property will generally be determined by the location of the property at the time title passes. Title passes at the location and time when the seller's rights, title, and interest in the property are transferred to the buyer. The title passage rule derives from the law of sales and generally allows the parties to arrange title passage wherever they choose.
However, Treas. Reg. Sec. 1.861-7(c) provides that, when a sales transaction is arranged in a particular manner for the primary purpose of tax avoidance, "all factors of the transaction, such as the negotiations, the execution of the agreement, the location of the property, and the place of payment will be considered, and the sale will be treated as having been consummated at the place where the substance of the sale occurred."
Keep in mind that the Internal Revenue Code (Section 861(a)(6)) classifies "Gains, profits, and income derived from the purchase of inventory . . . without the United States . . . and its sale or exchange within the United States" as U.S.-sourced income.
Manufactured Inventory
As amended by the 2017 Tax Cuts and Jobs Act, IRC Sec. 863(b) now provides that gains, profits, and income from the sale or exchange of inventory property that is produced in whole or in part within and sold or exchanged without the United States (or vice versa) is allocated and apportioned solely based on the production activities concerning the property.
Title passage and location of sale are no longer factors in determining the source of income from the sale or exchange of inventory property. If the inventory is produced entirely in the United States, the income is U.S.-sourced income. Similarly, the income is foreign-sourced if the inventory is produced entirely in a foreign country.
Mixed-Source Income
Income from the sale or exchange of inventory produced in the United States and a foreign country is mixed-source income. The new law obsoletes the current regulations allocating such income between production and sales activities, and the source rules applicable to the portion of income attributable to sales activities.
However, current treasury regulations are still effective to the extent they describe the source of income attributable to production activities. Under the regulations, production activity means activity that creates, fabricates, manufactures, extracts, processes, cures or ages inventory. With some exceptions, the only production activities that are taken into account are those carried on by the taxpayer.
The income attributable to production activities is sourced according to the location of the production assets. Production assets include only tangible and intangible assets that the taxpayer uses directly to produce inventory. Production assets do not include assets that are not directly used to produce inventory, such as accounts receivable, marketing intangibles, and customer lists. For inventory produced both inside and outside of the U.S., the source of income is determined by the ratio of the average adjusted bases of where production assets are located.