H-4 Visa and Want to be Shareholder in S-Corp

[kshah083]

How are you..?? I have a question and need your help...

I am on H4 dependent visa, has been living in USA since 2006... Am I considered as Resident for Tax purpose and can be a passive partner in S-corp which has been established since 1993??

The owner of the company is willing to give me some percentage of share in established company which is up and running with Annual revenue about $1.03 Million...

Do i need to do some financial transaction to be a passive partner (investment) or He can simply gift some percentage of shares on my name without having any financial transaction??

Of course, I wont be working since I am not allowed to... and this company owners take most of the profits in salary every month and show may be loss or minimum profit.... so that their K-1 get low...

in that case, Being passive Investor How would take monthly dividend.. if i can...? in what form..? If i take the dividend how should i file for my personal Tax..because at the end of the year I would get K-1 i Guess....

Please torch me with your expertise on this issue.

[JoeF]

All shareholders of an S-Corp have to be US citizens or Permanent Residents.

For an S-Corp, the tax resident definition isn't used, but rather the Permanent Resident definition.

[Attorney_25]

The residence requirement for the S corp can be found here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations. It appears to be a tax residence requirement, not an immigration residence requirement. You can use that weblink to ask the IRS for more detail.

Of course as H-4 you cannot work, and that means you cannot actively run a business, but you may be a passive investor. To examine the details from an immigration perspective, please consult with a aqualified immigration attorney.

[JoeF]

The residence requirement for the S corp can be found here: http://www.irs.gov/B...S-Corporations. It appears to be a tax residence requirement, not an immigration residence requirement.

Well, from my research, most CPAs seesm to agree that all shareholders of an S-Corp have to be US citizens or Permanent Residents.

[kshah083]

Thank you for your reply.... I will ask IRS in detail.....

[t75]

Please also consult a CPA and business attorney before making any investment that you do not understand.

[chakrakr]

Well, from my research, most CPAs seesm to agree that all shareholders of an S-Corp have to be US citizens or Permanent Residents.

Check any of the forums frequented by CPAs . Almost all of them agree that ANY Tax Resident (including H1) can be shareholders of S-Corp. The only caveats are -- 1) They need to satisfy substantial presence test AND 2) They need to cease to be a shareholder if they leave the country (and become a non resident)

[kshah083]

I Consulted one of the CPA.... and He told me the same as JoeF said..... I also researched a lot on CPA forums.... the Ratio is 60 % are agreed to what JoeF said and rest of them are saying that H1/H4 can be a S-Corp Share Holder.....

[kshah083]

One of my CPA also advised " That I can open up another LLC with my Owner's brother who is also a citizen and work as a officer in the same company" After formation of LLC , LLC can be a Share Holder of S-corp and S-corp will pay management fees every month to LLC , Only thing is Owner's brother can not derive salary from the S-corp instead he can do it from the LLC.... and LLC Share holders are liable for paying taxes....

[JoeF]

I Consulted one of the CPA.... and He told me the same as JoeF said..... I also researched a lot on CPA forums.... the Ratio is 60 % are agreed to what JoeF said and rest of them are saying that H1/H4 can be a S-Corp Share Holder.....

Yup, that's pretty much what I found.

[chakrakr]

I Consulted one of the CPA.... and He told me the same as JoeF said..... I also researched a lot on CPA forums.... the Ratio is 60 % are agreed to what JoeF said and rest of them are saying that H1/H4 can be a S-Corp Share Holder.....

You should always go by what Your CPA says. You then have something to lean on. However, make sure your CPA knows that H1 holders are considered Resident for Tax purpose (Substantial Presence Test) .

[GcLLC]

I Consulted one of the CPA.... and He told me the same as JoeF said..... I also researched a lot on CPA forums.... the Ratio is 60 % are agreed to what JoeF said and rest of them are saying that H1/H4 can be a S-Corp Share Holder.....

And here is a possible reason why CPA's tend to be more conservative. From the IRS website:

Even if you meet the substantial presence test, you can be treated as a nonresident alien if you are present in the United States for fewer than 183 days during the current calendar year, you maintain a tax home in a foreign country during the year, and you have a closer connection to that country than to the United States. This does not apply if you have applied for status as a lawful permanent resident of the United States, or you have an application pending for adjustment of status. Sometimes, a tax treaty between the United States and another country will provide special rules for determining residency for purposes of the treaty. An alien whose status changes during the year from resident to nonresident, or vice versa, generally has a dual status for that year, and is taxed on the income for the two periods under the provisions of the law that apply to each period.

Many CPAs interpret the closer connection clause as a detriment from being an S corp shareholder (unless you are an USC or LPR). I would concur with Attorney_25 in that what IRS means is tax residency and if you are a resident alien (for tax purpose) then you can be an S corp shareholder. You might want to schedule consultation with a qualified attorney on this aspect.

Reading OP's post, I believe that there might be other problems. First, there might be issues in "gifting" shares from an S corp. First of all the partnership agreement should allow such a transfer. Many S-corp agreements generally prohibit selling or gifting shares without approval from all partners. Second, the donor would be liable for gift tax based on the valuation of the company.

Finally, a passive investor can take only a share of the profits/dividends distributed. Though there are no rules about the frequency of distribution of dividends, OP would get only hi/her share of dividends.

A guaranteed payment (usually paid monthly) is generally made for services rendered and is treated as salary by IRS. To get that would violate the conditions of H4.

[JoeF]

You should always go by what Your CPA says. You then have something to lean on. However, make sure your CPA knows that H1 holders are considered Resident for Tax purpose (Substantial Presence Test) .

Every decent CPA would know the difference between resident for tax purposes and the Greencard test. Fact is that the tax code uses both. And for an S-Corp, the tax code seems to refer to the Greencard test.

[t75]

I am curious as to why the owner of the company would want to "give" OP an interest in the company. This entire scenario sounds odd.

[chakrakr]

Fact is that the tax code uses both. And for an S-Corp, the tax code seems to refer to the Greencard test.

Incorrect. For S-Corp the regulation says "

A corporation having a shareholder who is a nonresident alien as defined in section 7701(b)(1)(B) does not qualify as a small business corporation.""

Definition of Non-Resident Alien is in USC 7701(b)(1)(B) (from Title 26, Chapter 1 Sec 1361) .

I know you prefer to interpret 7701(b)(1)(B) as 7701(b)-(1)(b) (of CFR) But the basics of legal world says that every reference is accurate including Case and hyphens. So 7701(b)(1)(B) is just what it is 7701(b)(1)(B) . It should never be interpreted as 7701(b)-(1)(b) . These are apples and oranges . Does not happen in legal world. I will take my words back if you can show a single instance from Tax Regulations (or any other regulation) where reference is not accurate.

Further, 7701(b)-(1)(b) does not define Non-Resident Alien

[chakrakr]

Further to that , instructions for S-Corp election (Form 2553 @ http://www.irs.gov/pub/irs-pdf/i2553.pdf ) says "

4. It has no nonresident alien shareholders." No where it says that there is a special meaning to non-resident alien for S- Corp.

Essentially, the reason for excluding NRA from S-Corp is, in case of S Corporation, the tax burden is passed to shareholder individuals and not to the corporation.

[chakrakr]

One more ... from http://www.state.nj.us/treasury/taxation/pdf/scorp.pdf ----

16. Can a permanent resident holding a green card become a shareholder or officer in an

S corporation? Can a resident alien become a shareholder or an officer of an S corporation?

The answer to both questions is yes.

This makes a clear distinction between Permanent Resident (Green Card holder) and Resident Alient and confirms that both can become shareholder of S-Corp.

[JoeF]

You mix CFRs and the law. So, you do what you accuse me of.

And anyway, the fact is and remains that the tax code uses both definitions of resident in lots of places.

[chakrakr]

You mix CFRs and the law. So, you do what you accuse me of.

And anyway, the fact is and remains that the tax code uses both definitions of resident in lots of places.

CFR often refers to Law (USC). This is common for Tax regulations as well as Immigration regulations.

Again, you failed to show ANY instance where a legal reference is not accurate . And BTW, Tax code NEVER differentiates between two definitions of Residents.

[Attorney_25]

FWIW, most CPAs and tax attorneys do not know the meaning of US lawful permanent residence, they only know the meaning of tax residence. However, I would be interested to see the analysis of these people if you want to post the links. I'm not going to provide a legal opinion in any case since this is an IRS issue and not an immigration issue.

Edit: Read the quoted/linked info, doesn't provide any new information. Still appears that tax residence is sufficient.

[chakrakr]

FWIW, most CPAs and tax attorneys do not know the meaning of US lawful permanent residence, they only know the meaning of tax residence. However, I would be interested to see the analysis of these people if you want to post the links. I'm not going to provide a legal opinion in any case since this is an IRS issue and not an immigration issue.

Edit: Read the quoted/linked info, doesn't provide any new information. Still appears that tax residence is sufficient.

Thank you for joining this discussion. I have researching this issue for quite sometime. The CPAs who says that Shareholders of S-Corp need to be Green Card holder use a term called Permanent Resident Alien. However, there is NO such term (Permanent Resident Alien) in Tax Regulations . The correct term is Resident Alien which includes H/L/EAD holders satisfying substantial presence test. This shows that those CPAs are not aware that a non-immigrant visa holder can still be a Resident Alien.

I have contacted many CPAs who publish such information and many of them have stood corrected.

I am posting a couple of links from a site called TaxAlmanac. This is a site for and by CPAs. If you click the profile of members answering, it shows they are all CPAs. Admin, please do not delete the links requested by Attorney_25

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Further, here is my analysis on this topic --

The regulation 26 CFR 1.1361 says –

"(g) Nonresident alien shareholder--(1) General rule. (i) A corporation having a shareholder who is a nonresident alien as defined in section 7701(b)(1)(B) does not qualify as a small business corporation."

And USC 7701(b)(1)(B) (from Title 26, Chapter 1 Sec 1361) reads as

b) Definition of resident alien and nonresident alien

(1) In general

For purposes of this title (other than subtitle B) -

(A) Resident alien

An alien individual shall be treated as a resident of the

United States with respect to any calendar year if (and only

if) such individual meets the requirements of clause (i), (ii),

or (iii):

(i) Lawfully admitted for permanent residence

Such individual is a lawful permanent resident of the

United States at any time during such calendar year.

(ii) Substantial presence test

Such individual meets the substantial presence test of

paragraph (3).

(iii) First year election

Such individual makes the election provided in paragraph

(4).

(B) Nonresident alien

An individual is a nonresident alien if such individual is

neither a citizen of the United States nor a resident of the

United States (within the meaning of subparagraph (A))."

As we see above, the definition of Resident Alien include those who satisfy the substantial presence test and this include non-immigrant visa (H1 and L1) holders.

Further, the definition of Non-Resident alien as defined in 7701(b)(1)(B) makes it clear that individuals satisfying substantial presence test should be excluded from the definition of Non Resident Alien

[JoeF]

Given that there is some disagreement, the prudent thing is anyway to not trust anything on forums, not even if stuff is posted by CPAs (do we really know they are CPAs, or are they just posing? After all, as the famous New Yorker cartoon said, "On the Net, nobody knows that I'm a dog"...)

The prudent thing is to discuss this one-on-one with a good CPA. A good CPA would know the difference between tax resident and Permanent Resident, since both are used extensively in the tax law. IRS even distinguishes both in their publications, e.g., Pub. 519, Tax Guide for Aliens, so I would expect a good CPA to know these things, much as I would expect a good immigration lawyer to know even obscure parts of the immigration law.

[kshah083]

I am curious as to why the owner of the company would want to "give" OP an interest in the company. This entire scenario sounds odd.

He is a known relative and want me to be a part of the company since i am MBA in Healthcare Administration and can be helpful to grow his company while changing in the Healthcare Laws are becoming frequent and He could not be able to get his company in compliance with DOH.........

[kshah083]

Owner of the company spoke to his own CPA who is been with him since last 15 years..... and he advised him same, the H4/H1 can not be S-Corp Share Holder..he also advised that if he is desperate to establish such a partnership than , company structure has to be changed to C-Corp or LLC.....I doubt to get an advise from Immigration Attorney since He would be an expert in immigration, not in IRS issue....

I know one such Immigration Attorney who is been practicing for 35 years, Lets assume that his advise would be positive and I can be Shareholder in S-corp.... What if He is wrong because by reading all of above posts, I assume that this is the Very Gray area where there is loophole in the system.... but I dont want to get benefit out of it since It can be violation of status or it would not..... its probability and I do not want to take slightest chance pertaining to my status......

On the contrary, This is the life time opportunity for my career and I don't want to loose it.......

[kshah083]

One more ... from http://www.state.nj....n/pdf/scorp.pdf ----

16. Can a permanent resident holding a green card become a shareholder or officer in an

S corporation? Can a resident alien become a shareholder or an officer of an S corporation?

The answer to both questions is yes.

This makes a clear distinction between Permanent Resident (Green Card holder) and Resident Alient and confirms that both can become shareholder of S-Corp.

I am forwarding this link to CPA of the company.... Only concern is this is for State of NJ, this S-corp is in New York City , state of NY..... Are the rules differ by State??