Glossary
Effectively Connected Income (ECI)
Definition
Effectively connected income (ECI) is income of a foreign person that comes from a U.S. trade or business, or that is treated as connected to one. It is generally taxed on a net basis at regular U.S. rates, after allowable deductions.
Why ECI matters
ECI is the category of U.S. income that a nonresident individual or foreign corporation reports on a return and pays tax on at graduated rates, much like a U.S. person. Deductions connected to that income are generally allowed, but usually only if a timely and accurate return is filed.
What can be ECI
- Business profits from a U.S. trade or business, including through a pass-through entity.
- Wages for personal services performed in the United States.
- Certain U.S. real estate income when the owner makes the net-basis election.
- Gain from the sale of a U.S. real property interest.
How it differs from other U.S. income
Passive U.S.-source income such as dividends, interest or royalties is often FDAP income, which is generally taxed at a flat 30% rate by withholding, or less under a treaty. Whether income is ECI or FDAP changes the return, the withholding and the tax rate.
Practical example
For example, suppose Daniel, who lives in Argentina, runs a consulting business through a U.S. LLC and performs services while visiting the United States. The profit from those services may be ECI, so he would generally need to report it on a U.S. return rather than rely on withholding.
General information, not tax advice
This page provides general educational information about U.S. federal tax rules. It is not individualized tax, legal or accounting advice, and it does not create a client relationship. Results depend on each taxpayer's specific facts.
Written by Roger I. Chirino, founder of Chirino USA Accountants & Advisors P.A.
Supported by licensed CPAs, IRS Enrolled Agents (EAs), and experienced U.S. tax professionals focused on cross-border compliance and planning.
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