Nonresident Aliens, Foreign Businesses, U.S. Expats May Receive Relief from U.S. Tax Problems Arising from COVID-19 by Arthur Dichter, JD, LLM
The IRS has issued a series of guidance providing relief for nonresident alien individuals, foreign businesses and U.S. expats living and working abroad who may be adversely affected by the COVID-19 international travel restrictions and forced to prolong their stays in the United States.
In general, individuals who meet U.S. residency tests are considered resident aliens (RAs), or income-tax residents, who, like U.S. citizens, must report and pay taxes on their worldwide income. Similarly, foreign businesses conducting activities in the U.S. due to the presence of employees or other personnel performing services in the country are considered to be engaged in a U.S. trade or business and subject to U.S. tax on income allocable to that activity. In order to qualify for the foreign earned income exclusion, U.S. citizens and residents must be working outside the U.S. for a specified period.
COVID-19 Medical Condition Travel Exception to the Substantial Presence Test
In general, foreign persons are considered RAs when they have a green card or when they are physically present in the U.S. for 1) a minimum of 183 days during a calendar year or 2) at least 31 days during a calendar year and 183 days or more over the previous three years, taking all of the days in the current year, 1/3 of the days in the previous year and 1/6 of the days in the next previous year. However, the law allows foreign persons to exclude certain days of U.S. presence, including days they are unable to leave the country due to a medical condition that arose while they were present in the United States.
Foreign citizens who have been unable to leave the U.S. due to canceled flights and disruptions in other forms of transportation, shelter-in-place orders, border closures and quarantines may use this medical condition exception to exclude up to 60 consecutive days they are in the U.S. during this emergency period. The first day of the 60-day period must begin after February 1, and before April 1, 2020. Similarly, foreign persons who earn income from the performance of dependent personal services performed in the U.S. may avoid having up to 60 consecutive days in the country counted against them for purposes of determining eligibility for tax treaty benefits.
To receive the benefit of the medical condition exemptions, foreign persons will need to maintain meticulous records. If there is an income tax return requirement, they must complete IRS Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, and attach it to Form 1040-NR, U.S. Nonresident Alien Income Tax Return Individuals who are not required to file Form 1040-NR are not required to file Form 8843 to claim the COVID-19 medical condition travel exception. The COVID-19 Medical Condition Travel Exception may be combined with other residency test exceptions (other excluded days or a Closer Connection Exception) to avoid U.S. tax residency status in 2020. Other special procedures apply for individuals claiming treaty exemptions.
Exemptions for NRAs, Foreign Corporations Engaged in U.S. Trade or Business Activities
Under U.S. tax laws, nonresident aliens (NRAs) who perform services in the U.S. and foreign corporations with employees or agents performing services in the country may be considered to be engaged in a U.S. trade or business (USTB) and subject to U.S. tax on income connected to that USTB. However, if an income tax treaty exists between the U.S. and the NRA or foreign corporation’s home country, the income of neither the NRA nor the foreign corporation will be subject to U.S. tax unless their trade or business activities are conducted through a U.S. permanent establishment (PE), such as an office or other fixed place of business or a dependent agent.
Due to COVID-19 emergency travel disruptions, individuals may be temporarily in the U.S. performing services or other activities that would give rise to a U.S. trade or business or permanent establishment for them or for their employers. To account for the extended number of days individuals are forced to remain in the U.S. and to prevent NRAs, foreign corporations and foreign partnerships from being considered engaged in USTBs that they otherwise would not be, the IRS is granting an uninterrupted period of 60 days beginning between Feb. 1, 2020, and April 1, 2020, to operate in the country without creating a USTB.
To qualify for this relief, individuals must 1) have been present in the U.S. between Feb. 1, 2020 and April 1, 2020, 2) be nonresident aliens or U.S. citizens or green card holders whose tax homes were outside the United States in 2019 and 3) be reasonably expected to have a tax home outside the U.S. in 2020. Similarly, for that same 60-day period, the IRS will not consider services performed by an individual temporarily present in the U.S. due to COVID-19 emergency travel disruptions for determining whether the nonresident, foreign corporation, or foreign partnership has a U.S. PE.
As with the medical exception, individuals and foreign corporations taking advantage of this relief should maintain detailed records and be prepared to provide that documentation to the IRS upon request. Affected individuals and foreign corporations may consider filing protective returns for 2020, even though they may not believe they are subject to U.S. tax due to the disallowance of all deductions if IRS determines that they were engaged in a U.S. trade or business and failed to timely file an income tax return.
Relief for U.S. Nationals Living Abroad
U.S. nationals living overseas may qualify to exclude up to $107,600 foreign earnings from their 2020 worldwide taxable income when they meet one of two foreign residency tests:
- The Physical Presence Test, for which a S. citizen or resident is physically present in a foreign country for at least 330 days over a 12 months period; and
- A Bona Fide Residency Test, which is based on U.S. persons’ unique facts and circumstances, including having a tax home in a foreign country where they spend an uninterrupted period that includes an entire taxable year.
In the current environment of restricted travel, qualifying individuals will not lose their ability to exclude foreign earnings from U.S. income tax liabilities when the COVID-19 pandemic precludes them from working in the country where their tax home is located during the period between Feb. 1, and July 15, 2020. When the individual’s tax home is China (excluding Hong Kong and Macau), the coverage period is extended to Dec. 1, 2019, through July 15, 2020.
Due Dates for Income Tax Returns for Nonresident Aliens, Foreign Corporations and U.S. Expats
The IRS has postponed until July 15, 2020, the filing deadlines for 2019 income tax returns that would have otherwise be due on April 15 or June 15, 2020, as well as payments of 2019 tax liabilities and 2020 first and/or second quarter estimated tax payments.
The July 15 due date applies to the following:
- NRAs filing Form 1040-NR, regardless of whether they earned U.S wages;
- Foreign corporations filing Form 1120-F, regardless of whether they had an office or fixed place of business in the U.S.;
- NRAs filing Form 8840 to claim a Closer Connection Exception as well as those filing Form 8843 to claim excluded days in addition to the medical exception (i.e., students, teachers, trainees, and certain professional athletes); and
- S. citizens and tax residents filing Form 1040 who have a tax home outside the U.S. and who would otherwise receive an automatic two-month extension of time to file and pay their tax liabilities.
In addition, NRAs, foreign corporations and U.S, expatriates should consider that the due dates for state-level income tax filings and payments vary greatly among all 50 U.S. states and the District of Columbia.
The advisors and accountants with Berkowitz Pollack Brant have deep experience working with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.
About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or at firstname.lastname@example.org.