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# U.S. Source vs Non-U.S. Source Income Guide For Foreign-Owned Disregarded Entities

# 1. What Is a Disregarded Entity?
A foreign-owned Single-Member LLC is treated as a disregarded entity for U.S. tax purposes. The LLC does
not pay income tax separately. Instead, the foreign owner reports U.S. income directly.

# 2. U.S. Source Income (Taxable in the U.S.)
Common examples of U.S.-source income include:
* Services performed physically in the United States
* Business income connected to U.S. offices, employees, or warehouses
* Interest and dividends from U.S. companies or banks
* Rental income from U.S. property
# 3. Non-U.S. Source Income (Usually Not Taxable)
Examples of non-U.S.-source income include:
* Services performed outside the United States
* Foreign clients with foreign operations
* Digital services performed abroad
* Interest from non-U.S. banks
* Income from foreign investments
# 4. Key Rule: Where the Work Is Done
| The IRS mainly considers where business activities are physically performed. If the work is done in the U.S., income is generally U.S.-source. If done outside the U.S., it is usually non-U.S.-source.
# 5. Tax Impact for Foreign Owners

###### If income is U.S.-source:• Filing Form 1040-NR may be required
* U.S. income tax may apply
* State tax may also apply

###### If income is non-U.S.-source:
* Usually no U.S. income tax
* Form 5472 filing may still be required
# 6. Reporting Requirements
Foreign-owned Single-Member LLCs must file Form 5472 with a Pro Forma Form 1120, even if there is no
income. Failure to file can result in penalties of $25,000 or more.
# 7. Example Scenarios

###### **Example 1: IT Company Based in Nepal**
* Team and operations in India, clients in the U.S.
* Income is generally **non-U.S.-source**
**Example 2: Consultant Working in the U.S.**
* Services performed in the U.S. with physical presence
* Income is **U.S.-source** and taxable
**Example 3: E-commerce with U.S. Warehouse**
* Inventory stored and shipped from the U.S.
* Income is U.S.-source
# 8. Tax Treaty Note
Some countries have tax treaties with the U.S. that may reduce tax obligations. 

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