Deducting Foreign Business Expenses for US Taxes
The IRS allows business owners to deduct expenses that are both ordinary and necessary for carrying on a trade or business – and location doesn’t matter. Whether you’re running a consulting firm from Portugal, managing an e-commerce business from Thailand, or providing freelance services from Mexico, your foreign business expenses can reduce your US tax liability just like domestic ones.
Foreign business expenses are fully deductible on your US tax return. The key is that expenses must be ordinary (common in your industry) and necessary (helpful for your business). This means your overseas office rent, equipment purchases, and professional services can all lower your taxable income while you potentially owe zero US taxes through other expat benefits.
Are Foreign Business Expenses Tax Deductible?
Absolutely. The location where you incur business expenses doesn’t change their deductibility. If you’re paying for office rent in Barcelona, buying supplies in Bangkok, or hiring contractors in Berlin, these costs can all reduce your US taxable income on Schedule C.
According to the IRS business expense guidelines, expenses must meet two criteria:
- Ordinary: Common and accepted in your type of business
- Necessary: Helpful and appropriate for your business operations
You don’t choose between deducting foreign business expenses and claiming expat benefits. These work together. You can deduct business costs AND use the Foreign Earned Income Exclusion or Foreign Tax Credit to minimize overall tax burden.
Can You Claim Foreign Expenses on US Taxes?
Yes, with proper documentation. Your deductible foreign business expenses include the same categories as domestic ones:
Office and Equipment Costs
- Rent for foreign office space or coworking memberships
- Office supplies purchased abroad
- Computer equipment and software
- Internet and phone bills (business portion only)
Professional Services
- Foreign accountants, lawyers, or consultants
- Translation services for business documents
- Local business registration and licensing fees
- Professional memberships in foreign countries
Travel and Transportation
- Business travel between countries (fully deductible when entirely for business)
- Local transportation for business meetings
- Standard mileage rate for 2025: 70 cents per mile for business use
Marketing Costs
- Local advertising in foreign markets
- Website development and maintenance
- Business cards and promotional materials in local languages
What Expenses Are Tax Deductible in the USA for Expats?
Beyond regular business expenses, expats can claim the home office deduction for foreign residences. Whether working from a villa in Tuscany or an apartment in Tokyo, you can deduct business use of your home.
Home Office Options:
- Simplified method: $5 per square foot up to 300 square feet (maximum $1,500 annually)
- Actual expenses: Calculate business percentage of rent, utilities, and maintenance costs
Keep detailed records in US dollars. Convert foreign currency amounts using exchange rates from the transaction date. The IRS provides historical exchange rates for this purpose.
Is Foreign Business Income Taxable in the US?
Here’s where expat entrepreneurs get significant advantages. Your foreign business income may qualify for major tax benefits that work alongside your business deductions:
Foreign Earned Income Exclusion (FEIE)
- Exclude up to $130,000 of foreign-earned income for 2025
- Married couples can exclude up to $260,000 if both spouses qualify
- File Form 2555 to claim
- Best for entrepreneurs in low-tax countries
Foreign Tax Credit
- Dollar-for-dollar credit for foreign taxes paid
- File Form 1116 to claim
- Often better than FEIE if paying high foreign taxes
- Can be used on passive income that doesn’t qualify for FEIE
Example: Sarah runs a digital marketing consultancy from Germany. She earns $100,000 annually and pays $25,000 in German taxes. Her $15,000 business expenses (office rent, software, equipment) reduce her taxable income. Then she can either:
- Use FEIE to exclude the entire income (owing $0 US tax)
- Use Foreign Tax Credit to offset her US tax with German payments (also owing $0 US tax)
Who doesn’t love a tax break? Download our easy-to-use excel calculator to get an estimate of how the foreign earned income exclusion can save you money.
How Do Currency Conversions Work?
Your tax return must report all foreign business expenses in US dollars. Here’s how to handle conversions:
- Use exchange rates from the date you paid each expense
- For recurring monthly costs, you can use average annual rates for simplicity
- Keep records of rates used – the IRS may request this during audits
- Reliable sources include Treasury.gov or financial institutions
Create a spreadsheet tracking each expense with date, foreign currency amount, exchange rate, and USD equivalent.
Common Mistakes to Avoid
- Double-Dipping: Don’t deduct the same expense used to calculate your foreign housing exclusion as a business expense.
- Personal vs Business: Mixed-use expenses can only be deducted for the business percentage. If your phone is 60% business use, deduct 60% of the cost.
- Missing Documentation: Keep detailed English records or translate foreign receipts. Save everything for at least three years.
- Self-Employment Tax Confusion: Even if you owe no income tax due to FEIE or Foreign Tax Credit, you may still owe US self-employment tax. However, totalization agreements with some countries can exempt you.
How Do You Report Foreign Business Expenses?
Self-employed expats report business income and expenses on Schedule C attached to Form 1040. Here’s the filing sequence:
- Convert all amounts to US dollars using appropriate exchange rates
- Complete Schedule C with total income and deductible expenses
- File Form 2555 if claiming FEIE
- File Form 1116 if claiming Foreign Tax Credit
- Complete Schedule SE for self-employment tax calculation (if applicable)
Remember: You have an automatic extension to June 15 to file as an expat, with an additional extension to October 15 if needed.
What About Business Formation Abroad?
If you’ve formed a foreign corporation or LLC, additional reporting requirements apply. This complexity is where professional guidance becomes crucial – the wrong structure can create unnecessary tax burdens or compliance issues.
Key consideration: Different business structures have varying US reporting requirements and tax implications. What works best depends on your specific situation, income level, and the country where you operate.
Get Expert Help with Your Foreign Business Taxes
Managing US tax obligations while running a business abroad involves complex calculations, multiple forms, and constantly changing regulations. A single mistake can result in missed deductions or compliance issues.
At Greenback, we’ve specialized exclusively in expat taxes since 2009. Our team of CPAs and Enrolled Agents (many are expats themselves living in 14 time zones) have helped thousands of entrepreneurs just like you maximize deductions while staying compliant.
Have questions about your specific foreign business expenses? Contact us, and one of our customer champions will gladly help. If you need specific advice on your tax situation, click below to get a consultation with one of our expat tax experts.
The information provided in this article is for general guidance only and should not be considered as professional tax advice. Tax laws are complex and subject to change. For advice specific to your situation, consult with a qualified tax professional who specializes in expat taxation.
