What is IRC 1446 withholding on foreign partners and why is the U.S. partnership withholding from my share?

You are correct that partnerships are pass-through entities — the partnership itself does not pay income tax. However, each partner is taxed on their allocable share of partnership income. When a partner is a foreign person, the IRS has a collection problem: it cannot easily enforce tax collection against someone outside the United States.

IRC 1446 solves this by requiring the partnership to withhold tax on each foreign partner's allocable share of the partnership's effectively connected taxable income (ECTI). The partnership acts as the withholding agent, ensuring the IRS receives the tax upfront rather than relying on the foreign partner to file and pay.

Under IRC 1446, the partnership must withhold at the highest applicable tax rate on each foreign partner's share of ECTI:

- For foreign individual partners: the highest rate in effect under IRC 1 (currently 37%) - For foreign corporate partners: the highest rate under IRC 11 (currently 21%)

Since you are a foreign individual with a 40% share and the restaurant generates ECI, the partnership would compute your allocable share of ECTI and withhold at 37% of that amount. This is conservative — your actual tax rate may be lower after deductions and graduated rates.

To comply with IRC 1446, the partnership must:

1. File Form 8804 (Annual Return for Partnership Withholding Tax) reporting the total IRC 1446 tax withheld 2. File Form 8805 (Foreign Partner's Information Statement) for each foreign partner — similar to a K-1 but for withholding purposes 3. Make quarterly estimated payments of withholding tax using Form 8813 4. Provide you with Form 8805 showing the amount withheld on your behalf

The partnership must also still issue you a Schedule K-1 (Form 1065) reporting your share of partnership income.

As a foreign partner with ECI, you must file Form 1040-NR to report your share of the partnership's effectively connected income. On this return, you claim a credit for the amount withheld under IRC 1446 (shown on your Form 8805). If the partnership withheld more than your actual tax liability, you receive a refund.

Given that the withholding is at 37% (the highest individual rate) and your actual effective rate on restaurant income after deductions will likely be lower, you should expect to receive a refund for the over-withholding when you file your return.

In addition to the annual withholding on ECI, IRC 1446(f) (added in 2017) requires a 10% withholding when a foreign partner transfers (sells) their partnership interest. This is similar to FIRPTA withholding under IRC 1445 but applies specifically to partnership interests.

If you ever sell your 40% partnership interest, the buyer would be required to withhold 10% of the amount realized. This applies regardless of whether the underlying partnership assets include real property.