IRS Tax Realities

Green Card Test

You are a US tax resident if you hold lawful permanent resident status (green card) at any point during the calendar year. This status remains in effect until formally revoked, or until an administrative or judicial determination establishes that it has been abandoned.

Substantial Presence Test

You are a US tax resident if you satisfy both of the following conditions:

• • Present in the US at least 31 days in the current year
• • The weighted three-year total reaches 183 days or more. Formula: current year days + 1/3 of prior year days + 1/6 of the year before that

Exempt Individuals

Certain categories of individuals are exempt from the day count. These include F/J/M/Q visa holders in student or trainee status (subject to time limits), foreign government officials, and teachers or trainees under J visa (for the first two years). Professional athletes present solely for charitable events are also excluded.

Closer Connection Exception

Meeting the substantial presence test does not automatically establish tax residency. You may retain non-resident alien status if three conditions are met: you were present in the US fewer than 183 days during the current year, you maintain a tax home in a foreign country, and you have a closer connection to that country than to the US. To claim this exception, you must file Form 8840 (Closer Connection Exception Statement).

FDAP Income (Fixed, Determinable, Annual, Periodical)

FDAP income is passive-type income from US sources. It is subject to a flat 30% withholding tax (or a lower rate under an applicable treaty), and no deductions are allowed. The payer withholds tax at the source. Common examples include:

• • Interest income (with exceptions for portfolio interest)
• • Dividends
• • Royalties (software licensing fees, intellectual property)
• • Rents from US real property
• • Certain service payments where no ECI election is made

For Turkish entrepreneurs: if your US LLC receives royalty payments for software you developed, or if a US company pays you licensing fees, this income is typically classified as FDAP and subject to 30% withholding unless reduced by the US-Turkey tax treaty.

ECI (Effectively Connected Income)

ECI is income effectively connected with a US trade or business. Unlike FDAP, it is taxed at graduated rates — the same rates that apply to US residents — and allows deductions for business expenses. Filing Form 1040-NR is required. Common examples include:

• • Income from services performed in the US
• • Sales of inventory within the US
• • Income from a US office or fixed place of business
• • Income from a US partnership interest (if engaged in US trade or business)

For Turkish entrepreneurs: if you personally perform freelance consulting services while physically present in the US, or if your LLC has a US office generating SaaS revenue from US customers, the resulting income is typically ECI.

Practical Distinction for Digital Income

Advertising revenue (such as Google AdSense paid by a US company to your foreign account) is typically FDAP. SaaS subscription revenue collected through a US LLC with a US-based operation may be ECI. Software sold as a product (not licensed) from outside the US to US customers may not constitute US-source income at all, depending on where the sale is deemed to occur. Each situation requires individual analysis.

Article VII - Business Profits

Business profits of a Turkish resident are taxable in the US only if the enterprise operates through a 'permanent establishment' (PE) in the US. Without a PE, the US cannot tax those profits. A PE generally includes a fixed place of business such as an office, branch, or factory. The mere use of a US registered agent or mailing address does not constitute a PE.

Article XIV - Independent Personal Services

Income that a Turkish resident derives from independent personal services (freelance, consulting) is taxable in the US only under two circumstances: the individual has a fixed base regularly available in the US, or the individual is present in the US for 183 days or more in the relevant fiscal year. Turkish freelancers working remotely from Turkey for US clients are, as a rule, not subject to US tax on such income under this article.

Article XII - Royalties

Royalties arising in the US and paid to a Turkish resident may be taxed in the US, but the treaty caps the withholding rate at 10% (versus the default 30% statutory rate). This covers payments for the use of, or the right to use, copyrights, patents, trademarks, and similar intellectual property. Software licensing payments may qualify as royalties under this provision.

Claiming Treaty Benefits

Treaty benefits are not automatic. To claim reduced withholding rates or exemptions, the following steps are required:

• • File Form W-8BEN (individuals) or W-8BEN-E (entities) with the US payer, claiming treaty country (Turkey) and the specific article
• • Provide a valid Turkish tax identification number (TIN) on the W-8 form
• • File Form 8833 (Treaty-Based Return Position Disclosure) with your US tax return if claiming a treaty-based position that affects your tax liability

For detailed guidance on which W-8 form to use, see the W-8/W-9 Decision Map checklist.

States with No Individual Income Tax

The following states impose no individual income tax: Wyoming (WY), Nevada (NV), Texas (TX), Florida (FL), South Dakota (SD), Washington (WA), Alaska (AK). New Hampshire (NH) and Tennessee (TN) do not tax earned income but historically taxed interest and dividends (NH's tax on interest/dividends expired in 2025).

The absence of individual income tax does not mean the state imposes no taxes on businesses. Texas, for example, has a franchise tax (margin tax) that applies to entities doing business in the state.

State Nexus

'Nexus' refers to a sufficient connection between a business and a state that allows the state to impose its taxes. Common nexus triggers include:

• • Being formed (organized) in the state
• • Having a physical office, warehouse, or employees in the state
• • Exceeding economic nexus thresholds (revenue or transaction counts from that state)
• • Having a registered agent in the state (for franchise tax purposes in some states)

Franchise Tax vs Income Tax

A franchise tax is a fee for the privilege of doing business in a state. Unlike income tax, it may apply regardless of whether the entity earns a profit. Delaware charges LLCs an annual $300 flat-fee franchise tax. California imposes an annual $800 minimum franchise tax on LLCs. Texas applies a margin-based franchise tax. Wyoming and Nevada impose neither franchise tax nor state income tax — one reason they are popular for foreign-owned LLCs.

Who Must Pay

If you expect to owe $1,000 or more in federal tax after subtracting withholding and refundable credits, you generally must make estimated tax payments. For corporations, the threshold is $500. Non-resident aliens with ECI or other US-source income not fully covered by withholding are subject to this requirement.

Payment Schedule and Forms

Estimated payments are due quarterly:

• • Q1: April 15
• • Q2: June 15
• • Q3: September 15
• • Q4: January 15 (of the following year)

Individuals use Form 1040-ES; non-resident aliens use Form 1040-ES (NR). Corporations use the schedule prescribed under Form 1120. Payments can be made electronically through the IRS Direct Pay system or EFTPS (Electronic Federal Tax Payment System).

Underpayment Penalties and Safe Harbor

Inadequate estimated payments trigger an underpayment penalty under IRC Section 6654. The penalty is calculated as interest on the shortfall. Safe harbor rules provide protection: the penalty does not apply if you pay at least 100% of the prior year's tax liability (110% if prior year AGI exceeded $150,000) or at least 90% of the current year's liability. For non-resident aliens filing for the first time, the prior-year safe harbor may not be available.

W-9

Used by US persons (citizens, resident aliens, and US entities). A US person provides a W-9 to certify their taxpayer identification number (SSN or EIN) and confirm they are not subject to backup withholding. If your LLC has elected to be treated as a US corporation or you are a US tax resident, you file W-9.

W-8BEN

Certificate of Foreign Status of Beneficial Owner. Non-resident alien individuals use this form to certify foreign status, claim treaty benefits, and establish the applicable withholding rate. It is valid for three calendar years and expires on December 31 of the third year. Example: A Turkish software developer receiving royalties from a US company files W-8BEN, citing Article XII of the US-Turkey treaty for the 10% reduced rate.

W-8BEN-E

The entity version of W-8BEN. Used by foreign organizations (including foreign-owned LLCs that have not elected US tax treatment) to claim foreign status and treaty benefits. Requires the entity's foreign tax identification number. Example: A Turkish limited company (Ltd. Sti.) receiving consulting fees from a US client files W-8BEN-E.

W-8ECI

Used by a foreign person to claim that income is effectively connected with a US trade or business (ECI). Filing W-8ECI means the income is not subject to 30% withholding at the source; instead, the payee reports and pays tax on the net income via their tax return. Example: A non-resident alien operating a US-based consulting business through their LLC files W-8ECI with their clients.

Form 1040-NR

US nonresident alien income tax return. Required for non-resident aliens with US-source income, ECI, or when claiming a refund of over-withheld tax. Due date: April 15 (if you received wages subject to withholding) or June 15 (if no wages were subject to withholding). Extensions available via Form 4868.

Form 1120 + Form 5472

A foreign-owned single-member LLC that is a disregarded entity must file a pro forma Form 1120 with Form 5472 attached. Form 5472 reports transactions between the LLC and its foreign owner (such as capital contributions, distributions, and loans). Due date: April 15. Penalty for non-filing: $25,000 per form per year. This is required even if the LLC has no income.

Form 8833

Treaty-Based Return Position Disclosure. Required when a taxpayer takes a position on a tax return that a treaty provision overrides or modifies the Internal Revenue Code. For example, if you claim under the US-Turkey treaty that your business profits are exempt from US tax because you have no permanent establishment, you must disclose this position on Form 8833.

Form 8938 (FATCA)

Statement of Specified Foreign Financial Assets. Required for US persons (including tax residents) whose foreign financial assets exceed certain thresholds. Filed with the annual tax return. Thresholds vary: $50,000 at year-end or $75,000 at any time during the year (higher for joint filers and those living abroad).

FATCA (Form 8938)

US persons must report specified foreign financial assets if they exceed thresholds ($50,000-$200,000+ depending on filing status and residence). Filed with your tax return. Administered by the IRS. Penalties: $10,000 for failure to file, up to $50,000 for continued non-filing after IRS notice.

FBAR (FinCEN Form 114)

US persons with foreign financial accounts exceeding $10,000 aggregate value at any time during the year must file. Separate from tax return, filed electronically with FinCEN (Financial Crimes Enforcement Network). Due date: April 15, with automatic extension to October 15. Penalties: up to $16,117 per account per year for non-willful violations; up to $161,174 or 50% of account balance for willful violations. Criminal penalties may also apply.