Are you an American abroad, planning to start a business, or already in one? It’s important to know the foundation for dealing with US expat taxes. Further, we’d like to share with you our small business tax guide for Americans abroad:
Small Business Record Keeping
The first thing in the tax guide for small businesses is remembering to keep record. By record keeping as a US citizen abroad and small business owner, you help not only yourself, but the IRS. From record-keeping, the IRS knows what calculations on your revenue is verified. Plus, what the deductions are for your tax return.
Keep track of business expenses by opening up a bank account specifically for your business. Then, use the account exclusively for business transactions. Keep in mind, that you will most likely need to fill out extra paperwork and file the FBAR / FATCA Forms every year. This is a tax liability for foreign account holders for the IRS tax authorities.
Tracking Gross Receipts
Gross receipts according to the IRS are “the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses.”
As a small business owner and American abroad, you will need to track every piece of revenue from your business, as gross receipts.
Gross receipts can be:
- bank deposits
- sales receipts
- cash register receipts
- and/or credit card receipts from your business and your customers
If you are an independent contractor, you may receive a 1099-MISC if your payments have exceeded $600 and you are working for a US Client.
Most importantly though, is to continue recording payments and storing gross receipts as you continue your business. Gross receipts and income = income before any business expenses, deductions and tax!
MyExpatTaxes is the “Best for Business Owners” by the Balance.
Travel Deductions as a Business Owner
Additionally, we also suggest you keep track of travel expenses and meals, so you can enter this information in our expat tax software to apply deductions for the IRS.
In order for each travel expenses to be tax deductible they will need to happen outside of your tax home. Plus, if your travel expenses are directly linked to your business, they will most likely be deductible. For example, if you have a Bitcoin startup and you attend a Bitcoin summit over the summer to network and promote your company, that will most likely be an acceptable travel expense the IRS allows you to deduct.
When also deducting meal expenses in addition to travel expenses, an important thing to remember is that not 100% of meal expenses are deductible. Your deductible business meal expenses are a percentage of your actual business meal expenses or standard meal allowance. The percentage is usually 50%.
Filing Deadlines for Small Business Owners
Generally, as we all know, it’s important to file your worldwide income on time to avoid the potentiality of receiving hefty penalty fees.
If your type of business is one of these:
- a person who owns a business overseas/foreign cooperation
- a person who owns a foreign limited company
…you must file your business’s revenue on the due date as your personal income.
This means for Americans abroad in the year 2023, you must pay any taxes that you owe by the April 18th deadline. Furthermore, as an expat, you get until June 15th to file or request an extension. If you file for an extension by the June 15th deadline, October 16th will be the extended date to which to have to file by.
Now if your overseas business/foreign corporation has a trust, you will need to report that on Form 3520-A by March 15th. Though it is possible to receive an extension to September 15th or October 16
th depending on the business activity.
If you are an American LLC (limited liability company) owner living abroad, your tax classification will be different than those in the US. You can file your return with other individual taxpayers on June 15th.
If your LLC has been reported to the IRS, it is seen as a corporation (S Corporation). You will need to honor the corporate filing deadline, which is March 15th.
Specific Tax Forms For Your Specific Business
Not every business will be the same. There are certain tax forms you will need to fill out according to the business you own.
- Sole Proprietor – Being a sole proprietor means that you are self-employed without limited liability coverage (aka you are the same as your business). Digital nomads fall within this category, as well as consultants and freelancers. For this you will need to fill out Schedule C on Form 1040 to report profits and deductions from your business.
Additionally, you may need to pay self-employment taxes for your Social Security and Medicare to the US if you are not covered under a Totalization Treaty. We’ll help you figure that out in the MyExpatTaxes app!
- LLC (Limited Liability Company) – Revenue that your business takes in can be reported on your own individual tax return (Form 1040) with no need to file additional forms.
However, if you do own a foreign equivalent of an LLC abroad, you will need to first file out Form 8832. This is the IRS’ Entity Classification Election form. It shows the IRS there is another tax status/account under your name. You only need to fill this form once.
Then, every year you will need to fill out additional forms to claim your foreign disregarded entity, partnership or corporation depending on how you categorized your company on Form 8832.
- Corporation – If you own more than 10% of a foreign corporation you will need to file Form 5471.
- Business Partnership – If you made a partnership agreement and own a foreign business/corporation with someone else, that is classified as a ”partnership” for the IRS. You’ll need to file Schedule K-1, which reports financial activity from your partnership. Plus you’ll need to file Form 8865 which informs the IRS which specific foreign partnerships you are involved in.
Expat Tax Benefits as a Small Business Owner
Would it be a small business tax guide if it didn’t include tax benefits. As an American abroad and business owner, you can enjoy two expat tax benefits. They are the Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE). These benefits may be available to you depending on where you work and how much foreign income tax you pay.
Also, if your host country has a Totalization Agreement with the US, you’ll be able to save more money. The Totalization Agreement is a law between the US and several countries around the world to prevent US citizens from double taxation. The US is doing what they can to lessen the burden of double taxation for its citizens abroad.
Keep in mind: If you are a sole proprietor living abroad you will need to pay US FICA taxes. This is basically 15.3% of your income if you cannot claim the Totalization Treaty.
FBAR for American Small Business Owners Abroad
Lastly for the business tax guide, as an American expat, it doesn’t matter if you are an individual taxpayer or business owner. No matter where you live in abroad, you will need to:
- File for an FBAR every year as long as you make over the threshold. This is having over $10,000 in all foreign bank accounts (including your personal accounts) at any point during the year.
- File the FATCA Form 8938 if you and your business meet certain filing thresholds. An example is being a single filer who has more than $200,000 from the last day of the year)
MyExpatTaxes Has Your Back
This tax guide for small businesses is just a start when you’re looking to file your taxes. As always, the MyExpatTaxes software allows you to file all these forms electronically, in one place. If you do have a more complicated business structure (more than a sole proprietor), we can look into supporting you from our higher support tiers described.
A friendly tax professional from MyExpatTaxes is looking forward to help you file US taxes.