America is called the land of opportunity, but some entrepreneurial ventures are better suited to other countries. Digital nomads around the world have proven the viability of starting a business from your laptop and running your company from anywhere in the world. Even if you don’t start your company abroad, you might want to expand its operations to international territories sooner or later.
But whether you are starting your first company or looking to expand, you need to know about certain tax challenges and benefits that affect all expat entrepreneurs. We’ll cover some of the international tax challenges companies face and offer tips on how to avoid a regulatory nightmare as you expand.
Financial account reporting
First and foremost, if you have any international bank accounts, assume that they will need to be reported no matter what. All U.S. citizens have to pay taxes on worldwide income, not just the income they earn in the States.
Because of this, structuring your business as a foreign partnership or foreign corporation will not allow you to evade tax payments. While there are a couple of exceptions, it’s better to report all income from any foreign or international accounts you have.
Additional tax forms
On top of that, any international business ventures you own will require you to file extra tax forms. These include Form 4571 if you have a foreign corporation and Form 8865 if you have a foreign partnership.
These tax forms have to be attached to your standard U.S. tax return, which will be filed at the end of every year between January and April. Note that neither of these forms replace your typical U.S. tax return, so long as you are a U.S. citizen, you’ll file taxes in essentially the same way as if you still resided and did business in the United States. Be sure to check out these resources as you start your business.
Foreign tax benefit recognition
Some budding entrepreneurs are excited at the possibility of receiving certain tax benefits if they run their businesses abroad. While this may be true for some foreign entities, it’s not universally true because the U.S. doesn’t necessarily recognize tax breaks from other nations.
This is not unlike insurance and other similar financial logistics. Insurance is an increasing concern for people as there has been a 50% rise in the number of people purchasing a comprehensive life insurance policy since the pandemic began. Yet many expats are in for a rude awakening when they realize they have no international coverage with health insurance, life insurance, and more.
In the same way, you need to make sure that the U.S. shares the same tax break or has an equivalent before assuming that it will affect your finances. Because each nation has different business structures with different licensing, incorporation, and permit requirements, it would be wise to contact an accountant before setting up shop abroad. They’ll be able to tell you if your chosen country has similar or identical tax breaks to U.S. business tax codes.
Claiming special tax credits
If you have a U.S.-based partnership or sole proprietorship abroad, you might qualify for various tax credits or exclusions. These are only available to expatriates. Keep in mind, however, that claiming these credits can be tricky and your standard tax return will not assume that you claim them.
You’ll need to report all income you earned while abroad on your personal tax return and meet various IRS requirements for living abroad. Both of these conditions must be met before you can claim any expat-specific tax credits.
Getting in with a bank
Lastly, remember that various banks may not agree to service your business if you are a self-employed entrepreneur. That’s because the American IRS forces foreign banks to report on American accounts. This costs the banks extra time and money.
What’s more, according to recent surveys, over 40% of online business owners report being totally dependent on digital banking services for their financial needs. You don’t want to be stuck in another country without a digital banking service, or some other way to access U.S.-based accounts.
With that in mind, research possible banks ahead of time so you know where you can set up your finances before beginning your business abroad.
Tax tips for expat entrepreneurs
As you can see, there are lots of financial considerations when starting a business abroad. Cross-border freelancing adds complexity, but there are some things you can do to make your life easier. Here are some tax tips you can take advantage of to enjoy some serious savings come tax season.
Choose the right corporate structure
Think carefully about what is an ideal corporate structure when setting up your business abroad. One of the best examples would be a limited liability company (LLC), as such companies are disregarded when it comes to taxes. All the income for your company will flow through your individual tax return, so you don’t have to file separately for your corporate entity.
Of course, no matter what business structure you choose, be sure to file the right form. For instance, foreign LLC owners must file Form 8832 in addition to Form 8858 if they want to retain their disregarded status for each year following their initial filing.
File the FBAR
All expat entrepreneurs need to file the Foreign Bank Account Report (FBAR). Furthermore, be sure to file Form FinCEN 114 each year before April 15 if your business’s foreign bank account holds $10,000 or more at any point during your tax year.
Downloading these forms and filing them correctly will prevent you from getting hit with excessive fees by the IRS.
Remember to report if you’re self-employed
Self-employed digital nomads may think they get off scot-free, but it’s not that simple. You still have to adhere to certain filing tax codes, so be sure to report your income fully when tax season arrives.
Specifically, file Schedule C with your U.S. expat tax return. Even if you’re a freelancer, you still have to file so long as you earn $400 or more in income. Expat self-employed entrepreneurs are still required to pay the 15.3% U.S. self-employment tax, in addition to various social insurance taxes to one’s host country.
Claim all available deductions
Lastly, take advantage of any available deductions. The U.S. allows expat business owners to access tons of tax credits and other benefits so long as they are outside the U.S. for a full year or within a foreign country for 330 days consecutively within a 365 day period.
One of the best examples of a special tax credit is the Foreign Earned Income Exclusion (FEIE). This is a special exclusion intended to help Americans living abroad so they aren’t taxed double. This year’s FEIE deduction lets expat business owners (and regular travelers or dual citizens) exclude up to $108,700 of all foreign earned income from U.S. taxation.
Read up on IRS tax codes and tax breaks for foreign entrepreneurs to see everything you may qualify for. It might result in serious savings for your business at the end of the year.
Starting a business abroad could be the best decision you’ve ever made, but you can make it even better by knowing how much you have to pay and what forms to file each tax season. Keeping all of this organized and ready to go will ensure you aren’t fined unfairly and help you save money during the initial expensive years of your business venture.