America is historically a nation of pioneers and innovators. As such, it’s no surprise that the US is a global leader in technology, medicine, and energy; that our universities are among the best in the world; and that countless US businesses are known around the globe. We are constantly looking for new opportunities and new ways of doing things, and it is this pioneer spirit that drives many of us to search for opportunities abroad, leading many to become expat entrepreneurs.
Taxes for entrepreneurs
Americans though are burdened with what is probably the most extensive and far-reaching tax system in the world. Even if we live and work overseas, we still have to report our personal worldwide income to the IRS each year, and we may have to report our overseas bank accounts and assets too, and possibly pay US taxes. As an expat entrepreneur, we may also have to report our overseas business details and financial information. This depends on where our business is registered, and what company structure we employ for it.
Business structure and filing requirements
If your business is registered in the US with any type of company structure other than a limited liability company, business reporting requirements for expats are the same as for those who live in the US.
If your business is registered in the US as a limited liability company and you are its sole member, it is considered to be a ‘disregarded entity’ and no separate corporate filing is required (unless you elect for it to be treated as a corporation), though you must report any income from your business on your personal federal income tax return. #
“Information technology has allowed the global economy to become considerably larger and has rendered lucrative markets more accessible than ever.”
If the LLC has more than one member on the other hand, it is treated as a partnership for filing purposes, again unless you elect for it to be treated as a corporation.
If your business is a limited liability company registered abroad, you can elect for it to have the same ‘disregarded entity’ status as a US registered limited liability company by initially filing form 8832, and then form 8858 in subsequent years to maintain this status.
If your business is registered abroad with any other kind of company structure, you must file form 5471 each year to report its financial and ownership information. This is also true if you own or control just 10% of any foreign business, or if you are part of a group of US taxpayers who together control 50% or more of a foreign business, so not just if you’re the sole owner.
Finally, if you control one or more business bank accounts that between them and any foreign personal accounts contain an aggregate total of over $10,000 at any time during the tax year, you must file a Foreign Bank Account Report using FinCEN form 114.
All US expats who earn a minimum of $10,000 a year, or just $400 of self-employment income, are required to file form 1040 each year to report their worldwide income. While any tax due is still payable by April 15th, the filing deadline for expats is June 15th, with a further extension available until October 15th upon request.
You may also be liable to pay US taxes, even if you’re paying taxes abroad, however these can be offset or eliminated by electing to use either the Foreign Earned Income Exclusion, or the Foreign Tax Credit.
If you have foreign bank (or investment) accounts with a minimum of $10,000 at any time during the tax year, including any business accounts, you are required to file FinCEN form 114 (as also mentioned above).
Lastly, if you have assets abroad worth over $200,000, including your business but excluding a home owned in your own name (and is your primary residence), you are required to declare them on form 8938 attached to your annual federal return.
If you require any help or further advice regarding your particular situation, don’t hesitate to contact an expat tax specialist.