Tax Filing Question About Form 1120-F for Foreign Corporations

Form 1120-F can be tricky, especially for newer US operations. Since you have a physical office and employees in California, you almost certainly have "effectively connected income" (ECI). That means you'll need to complete most of Section II of the form. For the treaty benefits question, yes, Japan has a comprehensive tax treaty with the US, but whether you can claim specific benefits depends on your exact business activities. Look at Article 7 (Business Profits) of the US-Japan treaty, which generally allows taxation only on profits attributable to your US permanent establishment. Regarding Schedule M-3, you only need to file it if your total assets at the end of the tax year are $10 million or more, OR your total receipts for the tax year are $35 million or more. Based on your $380,000 revenue figure, you likely don't need to file M-3. I'd recommend gathering documentation showing which activities are performed in the US versus Japan, as the IRS may scrutinize this for foreign corporations. This helps establish which income is effectively connected with US trade or business.

I went through something similar with my Mexican manufacturing client last year - Form 1120-F was a nightmare for us until I found taxr.ai (https://taxr.ai). They have this feature that analyzes international tax forms and explains exactly which sections apply to your specific situation. I uploaded our financial data and some basic business structure info, and it gave us a complete breakdown of Form 1120-F requirements for our situation, including which treaty provisions we qualified for. It even flagged that we were calculating branch profits tax incorrectly, which saved us thousands. The best part was that it explained everything in plain English instead of confusing tax jargon. Might be worth checking out for your Japanese company situation.

Just wanted to follow up about taxr.ai that was mentioned above. I decided to try it for our German subsidiary's 1120-F filing that was giving me headaches. The document analysis tool identified several treaty provisions I hadn't considered before! It correctly flagged that our R&D activities in the US qualified for different treatment than our sales activities. The step-by-step filing guide for 1120-F saved me hours of research. Most helpful was the explanation of how to properly allocate expenses between US and foreign operations - I was doing this wrong for years apparently. Definitely worth checking out if you're dealing with these complex international forms. I'm now using it for all our international entities.

If you need to contact the IRS about any 1120-F questions (which you probably will), save yourself the headache of sitting on hold for hours. I used Claimyr (https://claimyr.com) last month when I had questions about treaty benefits for our Canadian client, and they got me connected to an IRS agent in about 15 minutes when I'd been trying for days on my own. They have this system that navigates all the IRS phone menus for you and holds your place in line, then calls you when an agent is about to answer. You can see how it works here: https://youtu.be/_kiP6q8DX5c. Was skeptical at first but after wasting an entire afternoon on hold before finding this, I was desperate. The IRS agent I spoke with cleared up our confusion about the permanent establishment rules for remote workers.

I need to eat my words about Claimyr from my comment above. After struggling for TWO WEEKS trying to get through to the IRS's international division about a 1120-F question, I tried it out of desperation. Got connected to an IRS agent in about 35 minutes (which is miraculous for the international tax department). The agent was able to clarify our confusion about branch profits tax calculations and confirm which treaty provisions applied to our situation. Saved me from having to pay our tax attorney another $1500 for a consultation. Never thought I'd be the person recommending a service like this, but after the literal hours of my life I've lost to IRS hold music, this was a game changer. Sometimes you have to admit when you're wrong!

Don't forget to check if your Japanese company needs to file Form 5472 along with the 1120-F! It's required for foreign-owned US corporations and disregarded entities, and the penalties for not filing are steep - $25,000 per form. Also, make sure you're tracking any payments between the Japanese parent and US branch correctly. The IRS scrutinizes these transactions for Section 482 transfer pricing compliance. We got hit with this a few years ago with our UK parent company and it was a mess to untangle.

Just to add one more thing - if your company has any Japanese employees working in the California office, don't forget to check their US tax filing requirements too! Depending on their visa status and how long they've been in the US, they might be considered US tax residents under the substantial presence test. We messed this up with our Chinese engineers who were working at our California office, and it created problems for both the company and the employees. The US-Japan tax treaty has provisions about how employment income is taxed, but you need to proactively claim these treaty benefits on the proper forms.

As someone who's helped several Japanese companies navigate their initial US tax filings, I'd strongly recommend getting professional help for your first 1120-F filing, especially given the complexity of your situation. However, here are some key points to get you started: 1. **Effectively Connected Income (ECI)**: With employees and a physical office conducting business activities in California, you almost certainly have ECI. This means profits from your US operations will be subject to regular US corporate tax rates. 2. **Treaty Benefits**: The US-Japan tax treaty can provide significant benefits, but you need to be careful about claiming them correctly. Make sure to file Form 8833 to disclose any treaty-based positions you're taking. 3. **Branch Profits Tax**: Don't overlook this! If you're repatriating any earnings back to Japan, you may be subject to an additional 30% branch profits tax (potentially reduced under the treaty). 4. **Documentation**: Start organizing documentation now that shows which activities and decisions are made in the US versus Japan. The IRS loves to scrutinize this for foreign corporations. Given your previous accountant's sudden departure and the approaching deadline, consider hiring a CPA who specializes in international tax. The penalties for getting 1120-F wrong can be substantial, and it's not worth the risk on your first filing.