US partnerships need to withhold taxes from income allocable to foreign partners at a higher rate than the flat 30% withholding rate. Here is some general information about withholding obligations:
According to US tax law, a foreign person’s income from sources within the United States is subject to withholding tax requirements. (There are certain tax-treaty provisions that lower the withholding rate or absolve the taxpayer from his requirement, but those provisions will not be discussed here.) Income is considered sourced in the United States if it relates to a business organized under US tax law or if its activities are conducted or assets are located in the United States. Income includes ordinary business income, interest income, dividends, rents and royalties. Only income derived from the sale of real or personal property and U.S. tax-exempt income (such as certain scholarship income and tax-exempt municipal bond interest) are not subject to the withholding requirements. The flat withholding rate is 30%. However, non-publicly traded partnerships must withhold 39.6% of allocable income to foreign non-corporate partners and 35% to corporate partners! The amount is withheld when the partner’s share of income is distributed or when the k-1 schedule is issued to the partner, whichever comes first. Stay in tuned regarding filing requirements of partnerships for withholding taxes of foreign partners.
Keep in mind that there will be additional filing requirements because of your foreign partner. Withholding taxes are required on the business income allocable to the foreign partner based on his % interest. Obviously if there is a net loss, there is no withholding tax. Standard withholding percentage for foreign partners on ordinary income from the partnership is 39.6% and the amounts withheld must be paid to the IRS quarterly (with forms 8813). Additionally, the partnership will need to file form 8804 regardless of whether or not the partnership had taxable income and form 8805 if the partnership had taxable income (revenues were greater than expenses). To summarize: If in 2014 your partnership will have a net gain then you will need to file 8804, 8805, and 8813. However, if you incur a net loss then the partnership will only have to file form 8804.
