Definition:
ECI, or Effectively Connected Income, refers to income that is connected with the conduct of a trade or business in the United States. For tax purposes, this classification is used by the IRS to determine which portion of a foreign person’s or foreign-owned company’s income is subject to U.S. federal income tax.
Examples of ECI include:
- Revenue generated by a foreign-owned LLC that actively sells to U.S. customers
- Income from services performed in the U.S.
- Gains from assets used in a U.S. trade or business
If a foreign individual or business is considered ETBUS (Engaged in a Trade or Business in the U.S.), then any income derived from that activity is likely classified as ECI and taxed accordingly typically via Form 1120 or 1040-NR, depending on the entity type.
Why it matters:
Correctly identifying and reporting ECI is critical for compliance. Failure to do so can result in penalties, interest, or audits from the IRS.
Who is it for?
Non-resident entrepreneurs, foreign entities, or investors earning income through U.S.-based operations must assess whether their revenue qualifies as ECI and fulfill related tax obligations.
