Opening a business can be difficult, but the process is especially challenging for American ex-pats living abroad. Our team can help you discover the perks of opening a business in a foreign country to make the process easier.
Owning and operating a business abroad as an American ex-pat puts you in a tricky situation regarding taxes. You must pay federal income taxes as long as you are still a U.S. citizen, even while living abroad. Your country of residence may also tax you. Perks of opening a business abroad include tax credits or exclusions to reduce how much you pay in taxes. The foreign tax credit could help you pay less to the U.S. federal government. The foreign earned tax exclusion could also reduce your taxable income, saving you money.
Call (541) 362-9127 to speak to our CPAs at US Tax Help to get help with your taxes while living and working abroad.
Paying Taxes as an American Expat with a Business Abroad
Opening a business abroad is exciting, but complex legalities make the situation challenging. Many American ex-pats living abroad and opening businesses often need help paying taxes.
Often, ex- ex-pats living abroad and operating foreign businesses pay taxes in the country where their businesses operate. They also must pay federal taxes to the United States government because they are still U.S. citizens.
It might seem as though opening a business abroad and living in a foreign country means getting taxed twice on the same income. Not only are you taxed by your new country of residence, but you also are taxed by the United States.
In truth, there are tax benefits and perks to opening a business abroad. Many of these perks provide workarounds to this double-taxation conundrum. Our team can help you assess your tax situation and determine how to take advantage of tax perks and benefits.
Claiming a Foreign Tax Credit While Operating a Business Abroad
Foreign tax credits might apply if a foreign government or U.S. possession taxes you. Since many ex-pat business owners abroad are taxed by the foreign countries in which they live, they can often take advantage of this credit. Tax credits work to lower your tax bill. For example, if you owe $700 in taxes but have a tax credit of $200, you only owe $500.
The foreign tax credit American ex-pats can take advantage of allows them to use the taxes they have paid overseas as a credit against their U.S. federal income tax. If you have paid $1,000 in taxes in your country of residence where you opened your business, you might claim a $1,000 tax credit on your U.S. federal income taxes.
The limits of the foreign income tax depend on numerous factors, including your overall international income, the taxes you have already paid, and things like inflation. In some cases, ex-pats living and working abroad who pay a higher tax rate in a foreign country owe nothing in U.S. taxes.
This might be a significant perk for people opening a business abroad. The money you earn through your business is taxable income, and the United States and your country of residence may tax it. By claiming the foreign tax credit, you might only pay taxes in your country of residence where you operate your business.
Remember, this only applies to foreign taxes on income. If you are taxed on other things (e.g., sales tax, property taxes, taxes on inheritance), the foreign tax credit might not apply.
Taking Advantage of Foreign Earned Income Exclusions as an American Expat
Another potential perk of opening a business abroad as an American ex-pat is taking advantage of foreign earned income tax exclusions. Although this works a bit differently than the foreign tax credits discussed earlier, many of the qualifications are similar.
To qualify, you must meet one of the following criteria. First, you must be a U.S. citizen living in a foreign country for an uninterrupted period, including a full tax year. Second, you must be a U.S. resident alien who is a citizen of a foreign country that has an income tax treaty with the United States, and you must live in the other country for an entire tax year uninterrupted. Finally, you must be a U.S. citizen or resident alien physically present in a foreign country for at least 330 days during any consecutive 12-month time.
This tax benefit excludes income you earned from foreign sources (i.e., your business you opened abroad) from your U.S. taxable income. The maximum amount of foreign earned income you can exclude changes each year and is adjusted for inflation, so you should speak to our team before filing your taxes.
Foreign Income
When assessing foreign earned income exclusions, we need to understand what is considered foreign earned income. Generally, income from salaries, wages, and fees paid to you for personal services rendered by you fall under this exclusion. If your earnings would be considered normal or typical income in the United States, it likely meets the criteria for exclusion.
It is important to note that you can include income earned from self-employment. Many ex-pats living and working abroad work for larger businesses or companies, but many others open their own businesses. Your self-employment income may be used to claim an exclusion, but only for income tax purposes. Other taxes related to your self-employment might not be offset.
Not Considered Foreign Income
We must also consider income that is not part of the foreign earned income exclusion. You cannot include income derived from pay received as a military member overseas, for services rendered in international waters or airspace, pay that would be excludable from income under different rules or laws, or pensions or annuity payments.
Call US Tax Help for Assistance Now
Call our experienced CPAs of US Tax Help at (541) 362-9127 to get help taking advantage of tax breaks for US ex-pats abroad.
