A US customer pays your LLC into a US bank account. Is that US-taxable business income? Those facts alone do not answer the question.
Effectively connected income, or ECI, depends on the business activity and the income involved. This guide helps you gather the facts for that assessment. It focuses on an LLC owned by a nonresident individual, without a corporate tax election.
Start with the activity, then classify the income
A single-member LLC is generally disregarded for federal income tax: its business activity and income are treated as the owner’s. A company with several members normally follows partnership rules instead.
The IRS ECI guidance starts with a US trade or business, often shortened to USTB. US-source business income connected with that activity is generally ECI. Some investment income and, in limited circumstances, foreign-source income can also qualify.
That last point matters. “Foreign-source” is not a universal exemption, just as receiving dollars is not proof of US-source income.
Services generally follow where the work happens
For ordinary service income, the IRS sourcing rules look at where services are performed. The customer’s address, contract currency and payment account do not decide the source.
Consider a consultant working entirely in Portugal for a US client. The consulting fee is generally foreign-source. If some project work is performed during a US visit, the payment may need allocation between US and foreign work. Keep workday and project records rather than assuming the entire invoice has one source.
| Business fact | What it helps establish |
|---|---|
| Services performed entirely abroad | Generally foreign-source service income |
| Project work performed partly in the US | Whether income needs allocation |
| US customer or US bank account | Payment facts, not the service location |
| Royalties for rights used in the US | A different sourcing rule from services |
Digital businesses need this distinction too. Licensing intellectual property is not automatically consulting. See the freelancer and agency guide for service businesses.
What can establish a US trade or business?
Describe what actually happens in the US. Work you perform there, employees, an operating office and agents conducting business on your behalf can all matter. An agent’s authority, duties and relationship with the business deserve more attention than the title on their contract.
A registered agent that receives legal notices is different from an agent selling products or regularly concluding contracts. Likewise, a mailing address is not the same as an operating office.
Forming an LLC, obtaining an employer identification number (EIN), having US clients or opening a US bank account does not, alone, establish a USTB. But none cancels out genuine US operations either. Review the full arrangement, including work done through other people.
Inventory needs its own analysis
The service-location rule does not carry over unchanged to goods. Purchased inventory generally follows where the sale occurs; manufactured inventory generally follows production activities. Contract terms and any US office involvement can change the analysis.
The IRS specifically identifies US sales of purchased inventory as a possible source of ECI. Stock held in a US fulfillment warehouse therefore deserves review. Living abroad and never visiting the warehouse are not blanket exemptions.
Nor should every warehouse arrangement receive the same answer. Separate the domestic-law USTB analysis from any treaty protection and state tax duties. Our Amazon FBA guide covers the records sellers should collect.
ECI, FDAP and treaties are different questions
For a nonresident individual, ECI is generally taxed after allowable deductions at graduated rates.
US-source fixed, determinable, annual or periodical income (FDAP), such as certain dividends, rents and royalties, may instead be taxed on its gross amount when it is not ECI. The general rate is 30%, subject to statutory exemptions or treaty reductions, as of October 2026 (IRS FDAP guidance). A business can receive both categories.
An applicable treaty may limit US tax on business profits unless you have a permanent establishment, or PE. That is a treaty-specific test, not another name for USTB. Eligibility depends on tax residence, the treaty and how the LLC’s income is treated. IRS Publication 901 explains treaty benefits and disclosure requirements.
A treaty position may still require a return and Form 8833. Choosing a W-8 withholding form does not settle the underlying tax analysis.
Keep owner and company filings separate
ECI can lead to an owner’s Form 1040-NR filing. A USTB can also create a filing duty even when no tax is due. Foreign partners have separate partnership filing and withholding rules.
Meanwhile, a foreign-owned disregarded LLC generally files Form 5472 with a pro-forma Form 1120 for years with reportable related-party transactions. Contributions and withdrawals can count even without ECI, under the IRS Form 5472 instructions.
State registration, income tax and sales tax use their own tests. Your country of tax residence may also tax the LLC’s income or classify the LLC differently. A US federal conclusion does not settle either.
A practical ECI review checklist
- Confirm the owner’s US tax residency and the LLC’s tax classification.
- Separate service fees, goods sales, royalties and investment income.
- Map where work, production, storage and sales activity happen.
- Record US travel, employee duties and agents’ contract authority.
- Ask which treaty provisions apply and whether disclosure is needed.
- Set the owner, company and state filing requirements separately.
Keep contracts and operational records alongside reconciled books. Our accounting service helps organize transactions; an ECI conclusion also needs facts that bank statements cannot show.
Frequently asked questions
Does withdrawing profit create ECI?
Not by itself. ECI follows the income and business activity, not the transfer to your personal account. A withdrawal can still be reportable on Form 5472.
Does no ECI mean no US filing?
No. Company information reporting, owner filing requirements and state obligations need separate checks.
Can I use last year’s ECI conclusion again?
Review changes first. A US work trip, new agent, inventory arrangement or different contract can change the facts supporting it.
Sources checked October 2026
- IRS: Effectively connected income.
- IRS: Nonresident income sourcing.
- IRS: FDAP income.
- IRS: Publication 901, US tax treaties.
- IRS: Instructions for Form 5472.
