Section 1446 of the Internal Revenue Code requires a partnership that has foreign partners to withhold tax on income effectively connected with a U.S. trade or business (ECTI). In this context, a U.S trade or business includes the rental of real property located in the U.S. The withholding rate is generally 35% unless a different rate is specified by a tax treaty. A foreign partner may, under Reg. Sec. 1.1446-6, reduce or eliminate the withholding by certifying to the partnership that it has partner-level deductions and losses available that can reduce or eliminate the tax on its allocable share of ECTI. The certification is made by the partner on Form 8804-C. A foreign partner must meet certain requirements to be eligible to use Form 8804-C. The first year a partner submits Form 8804-C, the partner must have filed (or will file) U.S. income tax returns for each of its three immediately preceding taxable years for which the partner is submitting the form. The partner is also required to timely file (including extensions) its current year return. If the current taxable year of the partner is not the first taxable year in which the partner submits the form, the partner must have met the requirements stated previously. The partner must fill out Form 8804-C completely and must also indicate the deductions and losses available to offset the income from the partnership for the current year. Common losses are net operating losses, passive activity losses and losses suspended due to basis or at-risk limitations. The deductions and losses shown on Form 8804-C must have been reflected on the K-1 issued by the partnership in prior years and not deducted in any of the partner's prior year returns. Furthermore, the partner can deduct losses from other U.S. partnerships other than losses that are suspended due to basis limitations. Here is an example of how Reg. Sec. 1.1446-6 is applied: NRA, a nonresident alien, and B, a U.S. person form a U.S. partnership, PRS, to conduct a real estate rental partnership. NRA and B are equal partners under the partnership agreement and each uses a calendar taxable year. Before the formation of PRS, NRA had never invested in any U.S. trade or business. In each of the first three years of operations, PRS incurred a loss of $1,000, which is allocated pro rata to each member. Assume that NRA has a suspended loss under section 469 and has timely filed Forms 1040-NR for each of the past three years, reporting the losses. For the fourth year, PRS is projected to show a profit of $ 4,000. On Form 8804-C, NRA will indicate that he has a suspended passive activity loss from the partnership of $1,500 which can be used to offset the projected income for the current year. If the Form 8804-C is submitted by the due date of the first installment of the Sec. 1446 withholding tax, PRS will withhold based on $500 of annual income (($4,000*.5)-1500). The reduced withholding tax will then be $43.75 each quarter ($500*.35 *.25) rather than $175 that would normally be required to be withheld. Foreign partners that are eligible to use Form 8804-C to reduce the amount of withholding tax they would otherwise be subject to can accelerate their cash flow from the partnership by avoiding having to wait to file a return to claim a refund of the tax that would otherwise have been overpaid. Partnerships with foreign partners may also benefit if cash flow is tight. Sandy Klein, CPA, is a partner at Shanholt Glassman Klein Kramer & Co., New York, N.Y.