Accounting & Tax

Non-Resident Taxation and Form 1040NR

Are you a business owner in the U.S. but neither a U.S. citizen nor a resident? If the answer is yes, there might be a question in your mind that has made you think: Taxation. There is a possibility that you might be under tax obligations in the U.S., even though you are a non-resident. Furthermore, since it is one of many indicators whether the investment in the U.S. is worthwhile, the issue of taxation is crucial to understand how the U.S. taxation system approaches non-resident aliens.

The main rationale behind the non-resident taxation is that if a non-U.S. resident meets certain criteria, such a person might be liable for certain taxation obligations, including filing tax returns.

In terms of filing tax returns, Form 1040NR becomes prominent. In short, Form 1040NR is the tax form for non-U.S. residents who have any form of U.S. income to file. Before filing Form 1040NR, relevant persons must, first, determine whether they meet the criteria for such obligation. In this regard, one of the two criteria listed below must be met:

  • Being a non-resident alien who runs a business in the U.S. even though there is no income or exemption
  • Having an income generated within the U.S. (e.g. investment, rent, etc.) which on the other hand does not fulfill the substantial presence test.

To be more precise, the substantial presence test is a test which the IRS uses to determine whether the person in question is a non-resident. According to the IRS, if a person has been physically present in the U.S. “on at least 31 days during the current year, and 183 days during the 3 year period that includes the current year and the 2 years immediately before”, that person is considered to be substantially present in the U.S.

Please note that non-residents who are to file Form 1040NR could only report their U.S. sourced income. Furthermore, apart from other administrative sanctions, failure to file a Form 1040NR might result in the loss of a refund.

It is again worth noting that your taxation obligation would definitely affect your existing or would-be investments no matter the degree of the investment. Therefore, it would be beneficial for you to consult professionals. If you have any questions on taxation as a non-resident, do not hesitate to contact us!