If you’re considering starting your own business, you’ll want to know everything that’s tax-deductible for business owners living outside the US. With this knowledge, you’ll be better able to plan for costs, plan for your taxes, and save money all at the same time.
What Are Tax-Deductible Expenses for Business Owners Living outside the US?
Based on the IRS definition, business expenses are the cost of carrying on a trade or business. These expenses must be both ordinary and necessary and are usually deductible if the company operates to make a profit. These business expenses are separated into the following categories:
- Cost of goods sold,
- Capital expenses,
- Business expenses,
- Deduction for qualified business income, and
- Personal expenses.
So, let’s break that down by category, and you’ll know exactly what you’re in for, tax-wise.
Cost of Goods Sold
Generally speaking, the cost of goods sold refers to the direct costs of producing the goods sold by the company. It can include the cost of raw material and labor directly used to create the good as well as storage and freight. It excludes indirect expenses, such as distribution costs and sales costs. The cost of goods sold is deducted from gross revenue to calculate a gross profit and gross margin figure.
Capital expenses are costs that an expat business owner would capitalize rather than deduct. Examples would be business start-up costs, business assets, and improvements. Capital expenses are also defined as the money a business spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. More examples include buildings, including costs to extend the useful life of the building, computer equipment, office equipment, furniture, and fixtures.
Publication 535 states the business expenses deductible to a business owner as well as what can or cannot be deductible per the IRS regulations. Some examples of what can be deducted are listed below.
- Payroll expenses to employees for the services they perform for your business
- Insurance expenses
- Retirement plans
- Interest expense
Deduction for Qualified Business Income
According to the Tax Cuts and Jobs Act, business owners may be able to take a deduction of up to 20% of your domestic qualified business income from a qualified trade or business expenses. The deduction is subject to various limitations, such as the type of trade or business, the amount of payroll wages paid with respect to the qualified trade or business, and the unadjusted basis of qualified property held by your trade or business. This deduction can be taken in addition to the standard or itemized deductions on your Form 1040.
Personal expenses, including living, family, or other general living expenses, cannot be used as a deduction under a business. However, certain expenses can still be deductible if partially used for the business, such as the usage of your home, including mortgage interest, interest expenses, utilities, repairs, and depreciation. Publication 587 includes all the details on how to work on calculating such deductions. Moreover, if you use your car in your business, you can deduct car expenses based on the percentage of the miles driven for business versus personal purposes during a tax year.
What About Home Offices Abroad?
The tax reform brought many changes, and one of those changes was the elimination of the home office deduction. Miscellaneous itemized deductions went by the wayside, so there is nowhere for this deduction to be claimed. Other deductions were increased to help mitigate some of the eliminated deductions, but this is worth considering for expats who will be working from home.
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