One of the greatest parts about running your own company and working overseas is the versatility that it can afford you. In today’s vastly-connected world, it’s incredibly possible to run a company from just about anywhere in the world, thanks to all of the advanced technology that keeps us wired in and ready to go. Before moving or developing a company abroad, you’ll want to consider overseas small business taxation. It’s complex and challenging, but absolutely worth your while if you wish to stay legally compliant in your home country and your business’ country.
Can you still launch, operate, and manage your overseas organization as well as you would in your home country? The simple answer is yes—and it can actually be much simpler (and more profitable). But as it is with any business dealing, you need to be mindful of your tax obligations as a business or self-employed worker. Here are our top tips for entrepreneurs wanting to file taxes for their business abroad!
1. Choose Your Company Structure
The first, and arguably the most important decision that expat small business owners need to decide on before starting up their small business is which company structure to implement. This selection entirely depends on the nature of the organization, and whether or not you have permanently relocated abroad. It makes the most sense to register your company in your country of residence if you have settled permanently overseas.
If you haven’t yet set permanent roots down abroad in one country, but you’re regularly moving between countries or planning to be abroad for a short period of time, it will likely make more sense to register your small business in your home country.
If your country of residence is the United States of America, the best options will be to choose to run your business either as a Sole Proprietor, Partnership, S-Corp, Limited Liability Company, or Corporation. In all these cases, US tax reporting requirements are the same as if you were living in the States. Do note that there is no separate corporate filing required for LLCs registered in the US.
2. Report your Personal Earnings
Under all circumstances, if you are a US taxpayer, you must disclose your personal earnings on your annual federal tax return from all existing income sources. This includes a foreign-registered small company, regardless of where you work, which country your earnings originates from, or whether you pay taxes in another country.
There are many strategies in order to extricate double taxation, such as the Foreign Tax Credit and the Foreign Earned Income Exclusion. In order to avoid double taxation, you will have to report your foreign profits on a federal return from the US.
Pro-tip: Although US tax day requires everyone to file by April 15th, expats get an automatic extension of the filing deadline to June 15th, and if necessary, they can seek a further extension to October 15th.
3. Track Gross Receipts
According to the IRS, gross receipts are the cumulative sums earned by the company from all sources during its annual accounting cycle, without subtracting any charges or expenditures. Expat taxpayers will need to monitor each bit of income from their company, as gross receipts.
Qualified gross receipts include:
- sales receipts
- cash register receipts
- bank deposits
- and/or credit card receipts from your business and your customers
If you are an independent contractor, and your annual wages have exceeded $600 and you are employed under a US client, you may receive a 1099-MISC ahead of your tax deadline. Most notably, when you begin your business, you can proceed with tracking payments and saving gross receipts. Net sales and income equal income due as a result of any company costs, losses and taxes.
4. Take Advantage of Deductions
When it comes to American tax season for expats running business aboard, Americans living and working abroad are qualified to receive some significant savings. The Foreign Earned Income Exclusion (FEIE) necessitates that eligible earners be outside the US for a full year without plans to return or residing in a foreign country for 330 out of a 365-day period. The FEIE effectively allows you to deduct the first $101,300 of foreign earned income from your annual income.
Company costs can also be withheld from your expat tax liabilities, as long as they are deemed ‘reasonable and ordinary’. Depending on the sort of company you operate, the following categories of costs can be written off:
- Legal services
- Taxes and licenses
- Meals and entertainment
- Professional services
- Car/truck expenses
- Rent (business space and equipment)
It’s also a good idea to research the tax guidelines in your host country, as requirements differ from location to location. In any event, consulting with an expat tax pro can help you make smart decisions when it comes to operating your business abroad. Also, check out our tax guide for American expat entrepreneurs.
5. Offshore Bank Account Reporting is Critical
One of essential reporting criteria that you may not have known about before launching your overseas business is Foreign Bank Account Report (FBAR). It is a key component of the U.S. government’s campaign to stamp out tax evaders seeking to stash cash in offshore banks. If at some stage during the tax year your company has a foreign account balance of $10,000 or more, you must file Form FinCEN 114 electronically by June 30th.
Note that this is an estimated figure, which means the aggregate sum of all your international accounts stands as the threshold. If you operate a foreign-based corporation, you will still need to file FBAR for your individual/personal account if it exceeds $10,000 during the current tax year. If you neglect to file and the IRS finds your account, the resulting fines can be severe, so it’s vital to maintain your FBAR filings each year.
A systematic long-term foreign tax preparation approach is the greatest way to optimize your foreign taxes each and every time tax season rolls around. Using these tips, you’ll have all of the tools you might need to ensure you’re ceaselessly compliant with your home country and business country’s tax obligations.
About the Author
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. He is currently a contributing editor for 365 Business Tips. Matt is passionate about marketing and business strategy and enjoys the San Diego life, traveling and music.