Can an H-1B holder open a Sole Proprietorship AND declare the relevant deductibles in his tax return?

Question

As far as I know, H-1B holder can indeed open an LLC or a Sole Proprietorship. However, they cannot work for this company (unless this company sponsors an H-1B visa for them), but only be a passive investor. I consider opening a consulting business and I wish to declare the deductibles on my tax return. How can I operate it as a "passive investor"? How can I declare deductibles without actively working for the company? your insights are very much appreciated!

Answer 1

This is a tricky question.

From the standpoint of tax or business law, there is nothing that prohibits an H-1B non-immigrant from operating a sole proprietorship, because for tax purposes, an H-1B non-immigrant is a U.S. resident with a Social Security number, who definitely has the right to operate a sole proprietorship.

From the standpoint of immigration law, however, a sole proprietorship operated by an H-1B non-immigrant is a huge gray area. H-1B non-immigrants are allowed to work only for their petitioning employers. So operating a sole proprietorship may theoretically constitute unauthorized employment and provide grounds for revocation of H-1 status. In practice, nevertheless, CIS seems uninterested in this issue, which, needless to say, may change any time...

If you wanted to do everything strictly by the book, you should form an LLC with at least one member (U.S. citizen or permanent resident) in addition to yourself and designate that other member as managing member (so you will be a passive investor). Then you can elect to pay taxes as partnership and have partnership's profits and losses flow through to you.

Answer 2

Yes, they pay FIT, and yes you are missing something. When you look up taxes that only SPs pay, FIT is not mentioned because everyone pays it. SPs also pay sales tax on things they buy, and pay real estate tax on any real estate they own, and they also pay their telephone bills and pay for the food that they eat, just like everyone else. You are not going to find a list of everything that SPs pay. SPs pay everything that everyone else pays (including FIT), plus they also pay self-employment tax.