Every day, the world becomes more tech-savvy, from the decline of brick and mortar stores and rise of online shopping to the ever-changing methods of communicating without having to be face-to-face. It’s true – the Internet has opened up a world of opportunity, and as an expat entrepreneur, it’s yours for the taking! You no longer need to be physically present to do business, so you can take your work abroad, living overseas and having new cultural experiences while building a business. With that said, there are certain expat tax return responsibilities you should be aware of as a corporation or self-employed expat. Here’s what you should know!
The structure of your company is very important when it comes to your expat tax return, as different types have varying filing requirements. A popular option is the Limited Liability Company (LLC). A domestic LLC with a single owner is considered to be ‘disregarded’ for tax purposes, which means the company’s reporting flows through the owner’s US Tax Return. This is certainly advantageous, since you will not need to file separate corporate taxes.
For a foreign LLC, you must elect disregarded status by filing Form 8832. You’ll only need to do this once, but then you must file Form 8854 each year in order to retain this status. Alternatively, if you were running a corporation, you’d need to file Form 5471, which is lengthy, confusing and often causes headaches for taxpayers. This form must be filed by anyone who owns 10% or more of a foreign corporation or makes a transfer to the corporation during the tax year.
If you work for yourself abroad, you must also file an expat tax return, but you’ll have a different set of filing requirements. You must file Schedule C (Profit or Loss from Business) along with your expat tax return. If you don’t have deductions, you might be able to file Schedule C-EZ, but most likely, you’ll have deductions – which will reduce your expat tax liability. The filing threshold for self-employed individuals is a mere $400 – which means it’s difficult not to exceed!
You’ll also have other tax considerations, like self-employment taxes. In 2017, the self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. The first $127,200 of income is subject to all of these taxes. After the $127,200 cap, the 12.4% Social Security portion stops, but the 2.9% Medicare portion remains on all of your income. If you’re a high-income earner, you may be subject to the new Medicare tax of .9%. It’s important to consult a tax professional if you are unsure about your specific filing requirements.
Reporting Offshore Financial Accounts
An additional requirement you’ll need to be aware of while living abroad is the reporting of foreign financial accounts. If your business has a foreign account balance of $10,000 or more at any point of the tax year, you’ll need to file a Foreign Bank Account Report (FBAR) form, also known as Form FinCEN 114. This is an aggregate amount – this threshold is the sum of all of your foreign accounts. Penalties are harsh for failure to file, so it’s important to stay on top of this each year.
In years past, the FBAR deadline was June 30th, but it is now due on Tax Day (April 15th) – however, you can extend the deadline to October 15th, if necessary. You can learn more about reporting financial accounts and deadlines by downloading a US expat tax guide.
Saving Money on Your Expat Tax Return
Fortunately, there are deductions and credits in place to help you avoid double taxation, but you must be aware of what is needed in order to be able to use them. For the Foreign Earned Income Exclusion (FEIE), you must either:
- Be outside the US for a full year with no intentions of returning, or
- Be inside a foreign country for 330 out of any 365-day period.
If you qualify using one of the above, you can exclude $102,100 of your foreign income in 2017. If you’re self-employed, you should note that self-employment tax is calculated on your full foreign income (before you exclude any with the FEIE).
So, if you make $150,000 in 2017, you’ll pay self-employment taxes on this amount, and then exclude $102,100 with the Foreign Earned Income Exclusion. In this example, you would have $47,900 of income ‘left over’ and available for US taxation before consideration of your personal exemptions and standard or itemized deductions. If you pay taxes to your host country, you may be able to take advantage of the Foreign Tax Credit (a dollar-for-dollar credit on the taxes you pay to a foreign country) or the Foreign Housing Exclusion (which allows for a deduction of some housing expenses that occur as a consequence of living abroad).
Business Expense Deductions
As a business owner, you also have the ability to deduct your reasonable and ordinary expenses from your US tax liability. “Reasonable” to you may be different than what the IRS deems as reasonable, but they encourage taxpayers to use their best judgment. As an example, a ride-on lawnmower is reasonable for a landscaper, but not for a marketing professional – when in doubt, common sense prevails!
A sampling of the deductible expenses on your Schedule C include:
- Contract labor
- Legal and professional services
- Car/truck expenses
- Rent (business space and equipment)
- Taxes and licenses
- Meals and entertainment
As a final note, when it comes to saving money on your expat tax return, you’ll need to consider where you will live overseas. Every country is different when it comes to taxation. For example, the United Arab Emirates has no individual or corporate taxes, but Japan’s corporate tax rate is about 35% and the highest marginal tax rate for individuals is 50% – yikes! Choosing your location wisely will have the biggest impact on your financial success as an expat entrepreneur.
Are you an Expat Entrepreneur in Need of Tax Help?
Our expat-expert team of CPAs and IRS Enrolled Agents are here to help making filing your US expat tax return a hassle-free process. Contact us today to have your expat tax questions answered.