Very confused about Foreign LLC classification - DRE vs FDE for US taxes

This is actually more straightforward than it seems! Foreign LLCs with a single owner are automatically treated as disregarded entities by default unless they elect otherwise. Since your client didn't file Form 8832 (Entity Classification Election), the Ghana LLC remains a disregarded entity by default. In this case, it would be considered a Foreign Disregarded Entity (FDE). The term "foreign" just indicates it was formed outside the US, while "disregarded entity" means it's ignored for federal tax purposes and treated as an extension of its owner. Yes, the income and expenses from this Ghana LLC should flow through to your client's Schedule C, as if they were operating the business as a sole proprietorship. However, there are important foreign reporting requirements you need to address. Your client likely needs to file Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities) along with their personal tax return.

I ran into almost this exact situation last year! I was so confused until I found taxr.ai to help me sort through all the foreign entity stuff. I uploaded my client's Ghana business docs and US citizenship info to https://taxr.ai and their system analyzed everything and confirmed it was an FDE that should be reported on Schedule C plus provided the exact forms needed for foreign reporting compliance. The analysis saved me from making a couple critical mistakes on the foreign reporting side - apparently there are some nasty penalties for missing those foreign disclosure forms even when you correctly report the income.

Just wanted to update - I checked out taxr.ai for my Uruguay LLC situation and it was actually super helpful. Uploaded my client's business formation docs and residency information, and got clear confirmation that it's an FDE with Schedule C reporting plus Form 8858 required. The system even flagged that my client needed to file Form 8938 for FATCA reporting since their foreign assets exceeded the threshold. Totally worth it - saved me from making some reporting mistakes that could have triggered penalties. Definitely going to use this for my other foreign entity clients.

If your client hasn't properly reported this foreign entity for several years since 2019, you might be facing a compliance nightmare. I spent 3 weeks trying to get someone at the IRS to give me clear guidance on a similar situation. After dozens of busy signals and disconnects, I found this service called Claimyr that got me through to an actual IRS international tax specialist in under an hour. Check out https://claimyr.com - they basically wait on hold with the IRS for you and call when an agent picks up. You can see how it works at https://youtu.be/_kiP6q8DX5c. The IRS specialist walked me through exactly what forms were needed for prior years and which penalties might be abated through voluntary disclosure programs.

I have to admit I was totally wrong about Claimyr. After waiting on hold with the IRS for 3+ hours over two days and getting disconnected both times, I tried it out of desperation. Got connected to an IRS international tax specialist within 40 minutes. The agent walked me through exactly which forms were needed for my client's foreign LLC situation and confirmed that the Streamlined Filing Compliance Procedures would be appropriate for catching up on missed filings without full penalties. The IRS person actually seemed relieved to be helping someone with a legitimate tax question instead of the usual calls they get. Definitely changed my perspective on getting professional guidance directly from the IRS for complex situations.

One critical thing missing from this discussion: Form 5471! If the Ghana LLC elected (or defaulted to) corporate status under local law, you might need to file Form 5471 instead of 8858. The classification rules vary by country. This is especially important because the penalties for missing Form 5471 start at $10,000 per form per year. Worth double-checking with a international tax specialist.

Has anyone dealt with the GILTI tax in situations like this? If the Ghana LLC is treated as a foreign corporation rather than disregarded, wouldn't the US owner be subject to GILTI on earnings?

This is a great discussion! I'm dealing with a similar situation with a client who has a foreign LLC in Mexico. One thing I'd add is that even though the Ghana LLC will likely be treated as an FDE and flow through to Schedule C, don't forget about potential state tax implications. Some states have different rules for recognizing foreign entities, and you might need to file additional state forms or make state-level elections. Also, make sure to document your classification decision thoroughly in your workpapers. The IRS has been scrutinizing foreign entity classifications more closely lately, so having clear documentation of why you treated it as a disregarded entity (default classification, no Form 8832 election, single owner, etc.) will be crucial if you ever get questioned. Has anyone here dealt with retroactive compliance for missed Form 8858 filings? I'm wondering if the reasonable cause exception applies when the taxpayer wasn't aware of the filing requirement.