Effectively connected income (ECI)
US-source income that is connected to a US trade or business and is taxed at graduated US income tax rates.
Definition
ECI is income that is 'effectively connected with the conduct of a US trade or business' under IRC § 864. Non-resident owners of US LLCs may owe US federal income tax on ECI at graduated rates (10%-37% for individuals, 21% for C-Corps). ECI is distinct from FDAP (fixed, determinable, annual, or periodical) income, which is generally taxed at a flat 30% (or lower treaty rate) via withholding at source.
Context
The ECI vs FDAP analysis determines how a non-resident-owned US LLC's income is taxed federally. Service-based businesses with US clients often have ECI; passive royalty or rental income is more typically FDAP.
Example
A Pakistani consultant's Delaware LLC bills US clients for services performed from Karachi. The income may be ECI if the LLC has a US trade or business (e.g., regular US-client billing through a US bank account); it may not be ECI if the services are truly performed offshore with no US trade-or-business presence. A US CPA analyzes the specific facts.
Common pitfalls
- The ECI determination is technical and fact-specific.
- Misclassifying ECI as non-ECI triggers underpayment of US tax.
- Treaty rates can override default ECI taxation but require specific treaty article application.