The IRS has provided relief to U.S. persons who had to conduct business in a foreign country because they could not travel home due to “travel disruptions.” In Rev. Proc. 2020-30, the IRS clarifies the issue of whether extended business travel triggers loss restrictions and reporting requirements for U.S. persons engaged in foreign activities.
Specifically, the IRS will not consider “temporary activities” in foreign countries when determining whether foreign activities give rise to a “foreign branch separate unit” for purposes of the dual consolidated loss rules, or the obligation to file Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches (FBs).
The IRS defines “temporary activities” as activities of a taxpayer conducted in a foreign country which is both 1) during a consecutive period of up to 60 days selected by the taxpayer within the calendar year 2020, AND 2) that would not have been conducted in the foreign country but for COVID-19 emergency travel disruptions.
The dual consolidated loss rules limit the ability of a domestic corporation to use a net loss attributable to a “foreign branch separate unit,” a business operation outside of the country carried on by a U.S. person. Also, Form 8858 must be filed by U.S. persons who own a foreign disregarded entity or foreign branch directly or indirectly. To determine if business activities rise to the level of a foreign branch separate unit, the time spent by employees or officers in the foreign location is considered.
Disregarding a 60-day time period spent in a foreign country makes it less likely a business will be subject to the dual consolidated loss rules and the Form 8858 filing requirement.
Example: If an individual acting on behalf of a domestic corporation traveled to a foreign country on March 1, 2020, and, because of U.S. or foreign government COVID-19 travel restrictions or recommendations, remained in the foreign country until April 27, 2020, any activities conducted by the individual during that period would constitute “temporary activities” if the individual would have left and not conducted the activities in the foreign country but for the travel restrictions.
It is important to note that the IRS includes the 60-day relief for “recommendations” to restrict travel, not just mandatory travel bans, as part of their definition of travel disruptions.
While no elections or statements are required to obtain relief, domestic corporations or US persons that treat activities as temporary activities must retain documentation to establish the 60-day period during which the temporary activities occurred and must provide this information to the IRS upon request.
U.S Tax Residency
In earlier guidance, the IRS gave similar relief for purposes of testing U.S. tax residency for nonresident aliens. Up to 60 consecutive calendars days in the U.S. will be presumed to be due to COVID-19 travel restrictions under Rev. Proc. 2020-20 and will not be counted under the “substantial presence test” or the eligibility rules for treaty benefits for personal service income. Nonresident individuals can select a beginning date for the 60-day period that will be disregarded but it must be between February 1, 2020, and April 1, 2020.
This relief must be claimed on Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition attached to Form 1040-NR, a nonresident alien’s income tax return. To claim an exemption from withholding on personal services income under a tax treaty, individuals must file with their employers or withholding agents a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.
Do you have a question about your business or personal tax obligations in light of the myriad COVID relief efforts? Reach out to your Frazier & Deeter tax advisor today.
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