It has never been simpler for Americans to create businesses while residing outside the United States than it is now, thanks to the rise of the “digital nomad.”
However, as long as the United States maintains the tenet of citizenship-based taxation, Americans living abroad must pay close attention to the tax, compliance, and planning implications imposed on all U.S. persons living abroad involved in early-stage start-ups and mature businesses.
Consequently, a taxable person in the U.S. may hold a controlling interest in a foreign firm. An American-owned business located outside the U.S. is likely to be treated as a Controlled Foreign Corporation, or CFC, for tax purposes in the United States.
A CFC is frequently subject to onerous tax reporting obligations, which can be confusing. At a bare minimum, the CFC is required to file IRS Form 5471 on an annual basis. If a CFC fails to file this form, even if no tax is payable, the Internal Revenue Service (IRS) can impose significant penalties on the CFC.
We’ve taken these aspects into account and come up with five top suggestions that American expat business owners should keep in mind to maximize the value of their cross-border operations while avoiding major compliance issues.
1) Smart and Precise Documentation of Business Records
By maintaining accurate records as a U.S. citizen living abroad and as a small company owner, you benefit yourself and the Internal Revenue Service. The IRS understands what calculations on your revenue are confirmed because of your record-keeping.
In addition, find out what deductions you can claim on your tax return. By setting up a business-specific bank account, you can keep track of all of your business’s expenditures. Then you should only utilize the account for business transactions and nothing else.
Keep in mind that you will very certainly be required to complete additional paperwork and submit FBAR / FATCA Forms annually. This is a tax burden for overseas account holders that is owed to the IRS.
2) Explore Expat Tax Benefits as a Small Business Owner
As an American living and working abroad who also owns a business, you are eligible for two types of ex-pat tax breaks. The Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion are the two tax breaks (FEIE).
Depending on where you operate and how much foreign income tax you pay, you may be eligible for these incentives. You will also save more money if your host country has a Totalization Agreement with the U.S.
The Totalization Agreement is a treaty between the U.S. and many countries worldwide that aims to prevent double taxes on U.S. residents. The U.S. is doing everything it can to alleviate the burden of double taxation on its people living abroad.
Keep in mind that if you are a sole proprietor operating from a foreign country, you will be required to pay US FICA taxes. If you cannot claim the Totalization Treaty, this amounts to around 15.3 percent of your gross income.
3) Don’t Forget About FBAR
US taxpayers who have one or more international financial accounts with a combined balance of $10,000 or more at any point during the tax year are required to file a Foreign Bank Account Report, often known as an FBAR, with the IRS.
The fact that FBARs are necessary not only for accounts in your name but also for any accounts over which you have control or signatory authority, such as a small company’s overseas bank account, should be noted by small business owners. FBARs are filed electronically through FinCEN form 114.
4) Choose Your Corporate Structure Carefully
When beginning a business in a foreign country, it is critical to consider how your firm will be structured. Different organizational structures result in varied tax reporting requirements. The Limited Liability Company, sometimes known as an LLC, is one of the most popular business structures (domestic and international businesses).
Domestic limited liability companies (LLCs) are regarded as “disregarded” for tax reasons. This means that all of the company’s reporting is done through the owner’s personal Federal Tax Return, which is straightforward. What are the benefits of doing so? There is no need for a separate corporation filing!
If you have a foreign LLC, you must elect ignored status by completing Form 8832. This form only needs to be submitted once, but you will need to file Form 8858 annually to maintain your ignored status. Those who choose the foreign LLC form typically maintain the ignored status indefinitely to avoid the IRS treating the organization as a corporation for tax purposes.
Form 5471, which is extensive and occasionally complicated, would be required to be filed if you were running a business entity. Anyone who owns 10% or more of a foreign corporation or makes a transfer to the corporation during the tax year must file this form with the IRS.
If you need more information on setting up an LLC, this guide could be a helpful reference.
5) Be Mindful of the Deadlines
It’s common knowledge that it’s critical to file your global income tax returns on time to avoid the possibility of obtaining significant penalties. If your sort of business falls into one of the following categories:
- a person who owns a business overseas/foreign cooperation
- a person who owns a foreign limited company
Then, you must file your business’s revenue on the due date as your personal income.
This means that if you are an American living overseas, you can file your tax return by the new deadline of July 15th. To accommodate the coronavirus, the deadline has been pushed out from its usual date of June 15. You can also request a longer extension, which will last until October 15th.
By the 15th of March, you will be required to declare any trusts that your overseas business or foreign corporation has established. Form 3520-A is the form that you will need to do so. However, it is possible to acquire an extension until the 15th of September or the 15th of October, depending on the nature of the firm.
The tax categorization of an American LLC owner who lives abroad will differ from that of an LLC owner in the United States. On June 15th, you will be able to file your tax return together with other individual taxpayers.
If your LLC has been reported to the Internal Revenue Service, it is treated as a corporation (S Corporation). You will be required to comply with the corporate filing deadline, which is March 15th, as stated above.
Now that you know some of the more common tax tips for American business owners abroad, we hope you feel confident about your future. If not, don’t worry! We can help with all of these issues and any others that may come up during the year. Taxes for Expats is a team of experts who will work to ensure your taxes are filed correctly and on time every year.