Sunday, April 3, 2011

Election to Treat Mexican Corporation as a Flow Through For US Taxation if Usually a Good Idea

If you own a business or real property in Mexico in a Mexican Corporation, you should consider making an election for your US tax return to treat that entity as a flow through entity.  Best to do this when it is originally formed, but that can be done at a later date also, though the benefits will not be as great.

Your election has no effect on the taxation in Mexico, but does create benefits in many instances with your US tax return.  The Mexican corporations that end in S.R.L, are the only eligible entity to make this election. If your Mexican corporation ends in S.A. de CV, the election cannot be made unless you work with your Mexican accountant and attorney to revise its type of entity classification under Mexican law.

The benefits of electing the flow through treatment is as follows:

  • You can deduct any yearly losses on your US tax return.
  • Though your share of the Corporations yearly earnings flow through to be be taxed on your personal tax return, you can claim foreign tax credits for all income taxes paid in Mexico on that income which will offset your US tax on the same income dollar for dollar.
  • If your corporation has a capital gain, that capital gain will flow through and be taxed to you on your personal return as a capital gain at the lower US tax rates (this is particularly good for corporations that investment in Mexican real estate and ultimately sell it).
  • You avoid the onerous US Foreign Corporation Subpart F income rules which cause many types of income in a regular Foreign Corporation to be taxed to you whether you receive that income or not and to be taxed at ordinary income rates on your personal tax return.  These rules usually prevent individuals from claiming foreign tax credits against that income for taxes paid in by the Mexican corporation on that income.
  • Assures in most situations capital gains treatment on your US tax return should you sell your stock in the corporation rather than that gain being taxed as ordinary income under the Subpart F rules which is often the situation.
Please contact us if you have Mexican corporation  and wish to make this election which again if often very advantageous to US shareholders on with respect to their personal taxes in the USA.