Top Tax tips for US Expat Small Businesses
1 – Choose the right company structure
The first decision American expat small business owners need to make when setting up their small business is what company structure to employ. This will depend on the nature of the business, and also whether you have settled abroad permanently in one country or not.
If you have settled abroad in one country permanently, it probably makes sense to register your business in your country of residence. (Don’t forget to familiarize yourself with the tax and filing requirements for that country). On the US taxes side, you must file form 5471 annually to report the company details and financial information.
If you haven’t settled abroad in one country permanently, but you are either regularly moving between countries or only abroad temporarily, it may make more sense to register your small business in the US, 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.
For limited liability companies registered in the US, no separate corporate filing is required. You can elect for limited liability companies registered abroad to have the same ‘disregarded’ status using form 8832, and then form 8858 annually to maintain this status.
2- Report your personal earnings
In all cases, as a US tax payer you must report your personal earnings from all sources – including a foreign-registered small business – on your annual federal tax return, regardless of where you live, from which country your income originates, or whether you are paying taxes in another country.
“U.S. entrepreneurs have long recognized that a world of opportunities is available to them if they are willing to expand beyond domestic borders.” – Yahoo Finance
There are several mechanisms in place such as the Foreign Tax Credit and the Foreign Earned Income Exclusion to prevent double taxation, however you must still declare your worldwide income on a US federal return.
While any US tax due is still due on April 15th, expats get an automatic filing deadline extension to June 15th, and can request a further extension to October 15th if required.
3 – Don’t forget FBAR
A Foreign Bank Account Report, or FBAR, must be filed by US tax payers who have one or more foreign financial accounts if they contain an aggregate total of $10,000 at any time during the tax year. Small business owners should note that FBARs are required not just for accounts in your name, but also for any accounts that you have control or signatory authority over, such as a small business’ foreign bank account.
FBARs are filed online using FinCEN form 114.
4 – FATCA for businesses
FATCA (the Foreign Account Tax Compliance Act) obliges Americans to report their foreign assets if they are worth over $200,000 (for non-residents), excluding a home owned in your name. The value of your small business should be included in this calculation. Also, starting this year, a U.S. corporation or partnership that has is 80% owned or controlled by a U.S. taxpayer may be required to file under FATCA too if more than 50% of the entity’s income or assets are foreign and “passive” (e.g., dividends, interest, rent, royalties, annuities, etc., or assets that produce these types of income).
5 – Social security, Medicare and FICA taxes
Expats still need to pay Social Security and Medicare taxes on their worldwide income if they’re self-employed, or if they’re working for a US-registered business, but not if they’re working for a foreign company. Your country of residence and the type of business structure you establish can have a significant impact on these taxes so it is important to plan carefully.
Sole proprietors and US-registered businesses still need to pay FICA taxes, even if the business owner is living abroad.
6 – If in doubt…
Our top tip though is that if you have any doubts about your expat tax situation, seek help from an expat tax specialist. Penalties for incorrect or incomplete filing for expats are steep, and expat tax filing is typically more complex than for Americans living stateside.