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When Does Tax Residency in the U.S. Apply to Business Presence?

This article discusses general principles of international tax law. It is not intended to provide tax advice. Consult your tax professional to provide tax advice based on your specific circumstances.

Surely this and many other questions are being asked by entrepreneurs throughout the United States.

It is important to understand that residence in United States for the purposes of tax does not necessarily have to do with immigration residence. An individual can have a tourist visa and may unknowingly become a tax resident in the U.S. That status can result from the “substantial presence” test which is the number of days the person has been in United States using the following calculation:

The number of days in the third year in U.S. divided by six.

The number of days in the second to the last year in U.S. divided by three.

One hundred percent of the number of days in the previous year in U.S.

For example, if an individual is not a citizen or a permanent resident of the U.S., but was living in the U.S. a significant number of days over the past three years, the formula to determine whether the person is considered a tax resident is applied as follows:

100 days in 2013

(consecutive or not),

divided by 6 = 17 days

120 days in 2014

(consecutive or not),

divided by 3 = 40

130 days in 2015

(consecutive or not),

at 100 percent = 130

Total number of

applicable days = 187

Because 187 days is more than fifty percent of the year (183 days), this individual would be considered a tax resident of the U.S. for the 2015 tax year.

Being or becoming a U.S. tax resident involves reporting all income generated by the taxpayer anywhere in the world.

The IRS requires the taxpayer to report all bank accounts held outside of the U.S., this includes bank accounts under his/her name or any other case where the taxpayer is a signatory.

Additionally, the taxpayer must disclose and submit financial statements for any company in which he or she is a shareholder of more than 10 percent. These reports must comply with U.S. GAAP accounting standards. Fines and late delivery of information to the IRS can be very expensive so it is very important to accurately report all sources of income to properly determine the year’s tax obligations.

There are also three other situations where the tax residence applies to an individual:

When the individual is a U.S. citizen,
When the individual is a permanent resent (Green Card holder) , and
Voluntarily decides to apply the tax residence regardless of their status immigration.
Fortunately, the United States and Mexico have an agreement to avoid double taxation where more rules on this could apply to each particular case.

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