The U.S. Tax Code has a whopping 6,871 pages. It is no wonder that EB-5 investors have questions as the April 15th tax deadline approaches.
Thank you for reading this post, don't forget to subscribe!Thankfully, most of the Code does not impact EB-5 investors. With tax day just days away, what do EB-5 investors need to be aware of?
Tax Identification Number
Let us start with the basics. A Tax Identification Number (TIN) is a number used by the Internal Revenue Service (IRS) and other government entities to identify individuals and entities for tax purposes. For individuals there are two common forms of Tax Identification Numbers:
- Social Security Number (SSN) – for U.S. citizens and eligible residents.
- Individual Taxpayer Identification Number (ITIN) – for individuals who are not eligible for an SSN.
Why Do EB-5 Investors Need a TIN?
There are several reasons why an EB-5 investor would need a TIN. First, EB-5 investors must report any U.S. income, which includes any interest or profit earned from their EB-5 investment. Additionally, an EB-5 investor that has obtained a green card may be considered a US tax resident and have US tax obligations. Also, investors that have opened a US bank or brokerage account may need a TIN.
Which Type of TIN Does an Investor Need?
As mentioned, there are two basic types of TINs for individuals – SSN and ITIN. Where an investor is in their EB-5 journey will determine which type of TIN they will need.
Investors in the following situations will need an ITIN:
- The EB-5 investor has not yet received their green card.
- The investor has US tax obligations, but does not have work authorizations.
The investor will need an SSN in the following situations:
- The investor has received their green card.
- The investor is working in the US or plans to work in the US.
How Does an EB-5 Investor Obtain an ITIN or SSN?
An EB-5 investor can apply for an ITIN (Individual Taxpayer Identification Number) if they are not eligible for a Social Security Number but have U.S. tax filing obligations or reporting requirements. To apply for an ITIN, the investor must complete IRS Form W-7, the official application for an ITIN. It is important to note that on the W-7 form, the requested address is not the address of the regional center that the investor is working with, but rather their own personal address.
The ITIN application must be submitted alongside a valid U.S. federal tax return, unless the applicant qualifies for an exception (such as filing under a tax treaty). The investor must also provide original documentation, or certified copies, to verify both identity and foreign status—most often, a valid passport is sufficient for this purpose. Other acceptable documents include a national ID card, foreign driver’s license, or a visa.
Once all documents are prepared, the application can be submitted by mail to: IRS ITIN Operation, P.O. Box 149342, Austin, TX 78714-9342 USA. Alternatively, investors may apply in person through an IRS Taxpayer Assistance Center that offers in-person document verification, or through a Certifying Acceptance Agent (CAA), such as an international tax or legal firm authorized by the IRS.
The typical processing time for an ITIN application is between 7 and 11 weeks, though it may take longer during peak tax season.
To apply for an SSN, the investor must first be physically present in the U.S. with their green card and be authorized to work. The next step is to complete Form SS-5, the Application for a Social Security Card, which can be downloaded from the Social Security Administration’s (SSA) website. The investor must then visit a local Social Security office in person to submit the application, as the SSA does not accept SSN applications by mail from first-time immigrant applicants.
At the appointment, the investor will need to bring original documents, including their green card (Form I-551), passport, and proof of age, usually the passport is sufficient for this. If applicable, they should also bring their I-94 record. After submitting the application, the SSN card is typically mailed within 2 to 4 weeks.
NCE Form 1065 and Schedule K-1
Each year, the New Commercial Enterprise (NCE), which is the entity that is responsible for receiving and maintaining the EB-5 investment funs must generate two important tax documents. The NCE will file Form 1065 directly with the IRS and it must provide each investor with a K-1.
If the NCE is structured as a partnership or as an LLC taxed as a partnership, it is required to file IRS Form 1065, the U.S. Return of Partnership Income. This form reports the NCE’s total income, deductions, gains, and losses for the year. The NCE itself does not pay income tax. Instead, it passes on any income or losses through to its partners, who are the EB-5 investors.
After the NCE files Form 1065, it is required to issue each EB-5 investor a Schedule K-1 (Form 1065). This is a personalized tax statement that reports the investor’s share of the NCE’s income, deductions, credits, and any capital gains or losses allocated to them. It may also include other relevant tax information, such as distributions. Investors use the details from their Schedule K-1 to report income or losses on their individual U.S. tax returns. Importantly, even if an investor does not receive any actual cash distributions from the NCE, they may still be responsible for paying taxes on income reported on the K-1, a situation commonly referred to as “phantom income.”
Difference Between an Allocation and Distribution
An allocation refers to the investor’s proportional share of the NCE’s income, gains, losses, deductions, and credits. It is essentially their portion of the partnership’s financial activity. This share is typically determined by the investor’s percentage of ownership in the NCE, which is usually based on their capital contribution. Allocations are reported annually on the investor’s Schedule K-1 (Form 1065) and are considered taxable income, even if the investor does not actually receive any cash. This can result in what is known as “phantom income,” where the investor owes tax on income that was allocated to them, but was not distributed.
A distribution occurs when the NCE actually pays out cash or property to the investor. Unlike allocations, distributions are not automatically taxable. whether they are taxed depends on whether the amount distributed exceeds the investor’s tax basis in the partnership. In essence, a distribution involves real money or value being transferred to the investor, but the tax treatment depends on the individual’s investment basis.
Tax Withholdings and EB-5
Tax withholding occurs when a portion of income is automatically withheld and sent to the IRS to cover an individual’s potential tax liability. It functions as a prepayment of taxes owed. For investors, the tax can be withheld from various types of income, including dividends, interest, rental income, or partnership income, such as income reported on a Schedule K-1.
In the EB-5 context, tax withholding depends on whether the investor is classified as a U.S. tax resident or a nonresident alien. For nonresident EB-5 investors, those who have not yet obtained a green card, the IRS generally requires withholding on U.S.-source income allocated to them through the NCE, as reported on their Schedule K-1. Withholding is typically 37% for effectively connected income (ECI) with a U.S. trade or business. For other types of passive income, such as interest or dividends that are not ECI, a 30% withholding rate applies, unless a tax treaty reduces it. For example, if the NCE allocates $10,000 of taxable income to a foreign EB-5 investor, it may be required to withhold $3,700 and remit that amount to the IRS on the investor’s behalf.
On the other hand, EB-5 investors who are U.S. tax residents are generally not subject to automatic withholding. Instead, they report the income on their individual tax return and pay any taxes owed through estimated payments or at the time of filing.
Year-End Distributions
Year-end distributions refer to any cash or property payouts made by the NCE to investors at or near the end of a tax year. This typically after the business has completed its accounting and determined whether profits are available for distribution. Importantly, they are distinct from allocations, which are used solely for tax reporting purposes and are reflected on the investor’s Schedule K-1.
Year-end distributions are actual payments made to EB-5 investors, and their timing is often strategic, usually occurring after profits are finalized but before the close of the fiscal year to align with tax planning. Many EB-5 projects withhold distributions until key milestones are achieved, such as reaching job creation requirements or the maturity of a loan. When distributions represent a return of the investor’s original capital, they are typically not taxable. However, if the investor has already recovered their capital or the distribution reflects business profits, it may result in a tax liability.
The impact of tax withholding on these distributions depends on the investor’s tax residency status. For nonresident EB-5 investors, the NCE may be required to withhold U.S. tax on their allocated income, even if that income has not yet been distributed in cash. As a result, when a year-end distribution is made, the NCE may reduce the payout by the amount of tax withholding required by the IRS. This withheld amount is sent directly to the IRS on behalf of the investor, who will then receive Form 8805 as proof of the taxes paid. The investor can use this form to claim a credit on their U.S. tax return, typically filed as Form 1040-NR. For example, if an investor is allocated $10,000 of taxable income and is due to receive a $5,000 year-end distribution, the NCE might withhold $3,700 (at a 37% rate), leaving the investor with just $1,300 in cash while $3,700 is remitted to the IRS.
For U.S. tax resident EB-5 investors, such as those holding a green card, withholding is generally not required. These investors typically receive the full distribution amount and are responsible for reporting the income and paying any associated taxes directly when they file their annual tax return or through estimated quarterly tax payments.
Please note that the above article is intended for educational purposes only. Any investor with specific questions or issues related to U.S. taxation are strongly encouraged to consult with a tax professional.
