US Citizens Starting a Business Overseas: Top Money-Saving US Expat Tax Tips
- 1. Find the Right Banking and Financial Help
- 2. Choose Your Corporate Structure Wisely When Starting a Business Overseas
- 3. Self- Employed Individuals & Business Reporting Needs
- 4. Offshore Bank Account Reporting Is Critical
- 5. Using Deductions and Exclusions to Lower US Taxes for Businesses Overseas
- 6. Don’t Forget About Money-Saving Expense Deductions!
- 7. Choose the Right Country When Starting a Business Overseas
- 8. Consider Buying an Existing Business
- Starting a Business Overseas Doesn't Have to Be Complicated
It is the Age of Technology. Some people would argue that technology may be expanding too far—just ask the parent of a teenager if they wish Instagram were never created!
But one thing is clear: the Internet has opened up a world of opportunities for entrepreneurs—literally. The business world is global and your physical location no longer determines where you can do business.
So what if you are a US citizen starting a business overseas? Can you still run your business as effectively as you would in the US? The answer is yes—and it may be even easier (and more financially rewarding) than working in the States.
But before you pack your laptop and head for the beaches of Bali, you need to be aware of your tax responsibilities as a corporation or self-employed individual. Here are the top 6 things entrepreneurs need to know about taxes when starting a business overseas!
- If you start a business overseas, and you’re working for yourself, you will have a different set of filing requirements – you must file a Schedule C (Profit or Loss from Business) along with your US expat tax return. Otherwise, you may need form 1120, 1120 S, 1065, or other forms. If you create/register a business overseas, you will have additional reporting requirements that you should discuss with a tax expert.
- You will need to file FBAR for your foreign individual/personal and business accounts if they hit $10,000 combined, even for one minute during the tax year.
- Reasonable and ordinary expenses related to your business can be deducted from US tax liability.
1. Find the Right Banking and Financial Help
The IRS requires foreign banks to provide information on accounts held by Americans, and the vast majority comply with the IRS’s demands. This requirement is to curtail tax fraud, as some individuals might attempt to hide money in offshore bank accounts.
Unfortunately, some foreign banks prefer to avoid doing business with American expatriates. Before you open your business, you’ll need to locate a bank that does business with expatriates and also offers the right combination of business services to help you maintain and grow your company.
Similarly, you may need to find an accountant who understands the unique nature of expatriate business owners. The right accountant can help you make decisions about legal structures and deductions, though you’ll need to make sure that they have experience handling foreign business operators.
2. Choose Your Corporate Structure Wisely When Starting a Business Overseas
It’s essential to think about how you will structure your company when starting a business overseas, as different structures trigger different tax filing requirements. One of the most popular business structures (for both companies in the US and abroad) is the Limited Liability Company or LLC.
Domestic LLCs are considered ‘disregarded’ for tax purposes. This means that the company’s reporting simply flows through the owner’s individual Federal Tax Return. Why is this advantageous? No separate corporate filing or additional corporate taxes!
With a foreign LLC, you must elect this disregarded status by filing Form 8832. This form only has to be submitted once, but then you must file Form 8858 annually to retain your disregarded status. Those who select the foreign LLC structure generally use the disregarded status ongoing to prevent the IRS from treating the company as a corporation for tax purposes.
If you are running a foreign corporation, you would need to file the dreaded Form 5471, which is lengthy and confusing. The filing requirements are complex. Generally, 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.
3. Self- Employed Individuals & Business Reporting Needs
When you start a business overseas but work for yourself, you will have different filing requirements. You must file a Schedule C (Profit or Loss from Business) along with your US expat tax return. The filing threshold for the self-employed is so low that it would be difficult not to exceed it! If you earn only $400 in a tax year, you must file.
In addition to your standard filing requirements, as noted above, you have other taxes to consider, such as self-employment taxes. The self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.
For 2023, only the first $160,200 of income is subject to the 12.4% social security tax. This amount tends to increase a little each year due to inflation. However, all of your earnings are subject to the 2.9% Medicare tax regardless of how much you earn. If you are a high-income earner, you may be subject to the additional Medicare tax of 0.9%. It’s essential to consult a tax professional if you are unsure about your specific filing requirements.
4. Offshore Bank Account Reporting Is Critical
FBAR, Foreign Bank Account Report, is one of those filing requirements you may not have heard about. It is part of the US initiative to smoke out tax evaders attempting to hide money in offshore accounts.
If your business has a combined foreign account balance of $10,000 or more at any point during the tax year, you must file Form FinCEN 114 electronically each year by April 15th (April 18th in 2023) though there is an automatic extension to October 15th if you miss the deadline. Remember that this is an aggregate amount—meaning the threshold is the sum of all your foreign accounts.
If you are running a corporation, you will need to file FBAR for both your individual/personal account and business accounts if they hit $10,000, even for one minute during the tax year. Penalties can be harsh and start at about $12,500 per year if you fail to file and the IRS discovers your account. It’s important to stay up on your FBAR filings each year.
5. Using Deductions and Exclusions to Lower US Taxes for Businesses Overseas
While the US has several helpful deductions and credits in place to help avoid dual taxation, you need to be clear on the qualifying stipulations for US taxes for businesses overseas. To qualify for the Foreign Earned Income Exclusion, you need to either be outside the US for a full calendar year (with no intentions of returning) or inside a foreign country for 330 days of any 365-day period. If you qualify, you can exclude $120,000 of your foreign income in 2023.
For self-employed individuals, it’s important to note that self-employment tax is calculated on your full foreign income—i.e. it is calculated on the income BEFORE you exclude it with the Foreign Earned Income Exclusion. The biggest surprise for self-employed individuals, including freelancers and digital nomads, who have recently moved abroad is that they are subject to self-employment tax.
So, for example, let’s say you make $150,000 in 2022. You pay self-employment taxes on this amount, then exclude $112,000 with the Foreign Earned Income Exclusion. In this example, you would have $38,000 of income ‘left over’ and available for US taxation. 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).
If you live in a country that has a Totalization agreement with the US and you are paying the equivalent of self-employment tax to your host country, you can claim an exemption from US self-employment tax. The Social Security Administration maintains a list of all countries with Totalization agreements.
6. Don’t Forget About Money-Saving Expense Deductions!
Reasonable and ordinary expenses related to your business can be deducted from US tax liability. What is considered reasonable to you may be different than what the IRS deems reasonable, but you are encouraged to use your best judgment. For example, a ride-on lawnmower would be reasonable for someone starting a landscaping business but not for a marketing consultant! Hair salon fees and subscriptions to fashion magazines may be reasonable for a model but not for someone who repairs industrial equipment. Some of the expenses you can deduct from your Schedule C include the following:
- Contract labor
- Legal and professional services
- Car/truck expenses
- Rent (business space and equipment)
- Taxes and licenses
- Meals and entertainment
Be aware that you may need to validate the legitimacy of these expenses and save any documentation that you can for three years or more. When in doubt, check with an accountant or tax professional to confirm the legitimacy of your deductions.
7. Choose the Right Country When Starting a Business Overseas
Consider where you are going to live! The best country to set up a business for tax purposes may vary, depending on your industry. There are no individual or corporate taxes if you move to the United Arab Emirates, but the overall cost of living is high. The tax rate in Japan is over 20% for corporations, and the highest marginal tax rate for individuals is a whopping 45%. Think carefully about where you reside, as that alone can have the biggest impact on your financial success abroad!
8. Consider Buying an Existing Business
Building a business overseas can be an enormous challenge. Not only will it require an investment of time and capital, but you’ll also struggle to build the brand recognition you need for your business to thrive. And when you’re living abroad, you may not understand the subtleties of reaching your target market.
Buying an existing business can streamline the process since you’ll be operating an established brand — ideally, one that has its own policies and procedures in place. That can be crucial during tax season. Unless there are significant problems with the company’s financial records, you can review prior financial data to put together revenue forecasts and other crucial data to help you know how to report your taxable earnings.
If you’re lucky enough to buy a business from another expatriate, you might benefit from some built-in mentorship.
Starting a Business Overseas Doesn’t Have to Be Complicated
Still have questions about your American expat taxes pertaining to your overseas business?
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.