…or at least within 18 months of their due date. Why? IRS regulations hold that if a foreign corporation files after that date they cannot take any deductions.
Consider a hypothetical corporation, Foreign Company Ltd., which has US source gross income of $100,000, and “necessary and ordinary” deductions of $100,000 for $0 net income. However, Foreign Company Ltd. didn’t file. Under the IRS regulations, it’s taxed at up to 35% of $100,000 (plus penalties and interest, of course).
This doesn’t seem right, and the Tax Court agreed that these regulations were wrong in Swallows Holding, Ltd. v. Commissioner (126 T.C. No. 6). The IRS appealed to the Third Circuit Court of Appeals, and Tax Analysts is reporting (in an opinion that has yet to be released—I’ll post a link to the ruling when it’s released) that the appeals court has reversed the Tax Court.
The Tax Court decision notes that in a 1940 case the Fourth Circuit held that there’s no reference as to time in the then regulations. I’m not sure that the two cases are at odds with each other (the current regulation was issued in 1990), but if they are this would be the kind of case that the Supreme Court would be likely to take (resolving a difference between rulings between two different appeals courts).
In any case, if you’re a principal of a foreign entity with US source income you’re now on notice. If you don’t file the tax return within 18 months of the due date you won’t get to deduct anything.