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Foreign Business in US-Tax aspects.

 

If you are such a person, this article gives you the basic tax and related issues you need to consider, such as:


·          business structure (LLC, corporation, etc.)

·          registering your business

·          federal income taxes

·          state and local taxes

·          property taxes

·          franchise taxes

·          occupancy taxes

·          nexus rules

·          sales taxes

·          employment taxes

·          international taxes


 

Choose the Right Business Structure

 

A foreigner (whether that person is living abroad or is a non-citizen residing in the U.S.) can start a business of almost any kind.

 

In the United States, you have several options for structuring your business. The most common structures are as follows: 


Single-member LLC. This is a flexible and popular choice for small businesses, offering limited personal liability and pass-through taxation. Profits and losses flow through the business to the owner’s individual tax return.

  • C corporation. Ideal for larger businesses and those seeking external investment, C corporations have their own tax rates and can issue different classes of stock.

  • S corporation. A tax-efficient option for small to medium-sized businesses. S corporations pass their income and losses through to shareholders for tax purposes. Unfortunately, an S corporation is not a suitable option for foreign entrepreneurs.

Non- residents are prohibited from forming an S corporation in the U.S. Each S corporation shareholder must be a U.S. citizen or a 

permanent resident alien.7

 

  • Partnership. Partnerships can be suitable for businesses with multiple owners who want to distribute profits and expenses in a non-linear manner, but there is little to no liability protection.8

  • Limited liability partnership. The LLC formed as a partnership gives you the advantages of the partnership and also provides general liability protection.

  • Sole proprietorship. This is the simplest structure, but it doesn’t provide personal liability protection. The sole proprietorship is often chosen by small businesses with a single owner.

 

 

The C corporation and LLC forms give you the best options if you are seeking liability protection.

 

Register Your Business

 

Once you’ve decided on your business structure, you need to register your business at both the federal and state levels.

 

At the federal level, you or your business generally needs to obtain an Employer Identification Number (EIN)9 from the Internal Revenue Service (IRS).

 

At the state level, you register incorporated and LLC businesses with the appropriate state agency, typically the Secretary of State’s office. You may need to file periodic reports or statements, which can include information about your business’s financial status and activities.

 

If your business had to file with a Secretary of State and it exists on January 1, 2024, or if you create such a business on or after January 1, 2024, you need to file a beneficial owner information (BOI) report and a company applicant information report with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).10

 

Secure Funding

 

Consider financing options to fund your business venture in the U.S. These can include using your personal savings, loans, or venture capital or seeking investors. Be prepared to present a solid business plan to potential investors or lenders to secure funding.

 

Establish Banking and Financial Infrastructure

 

Open a U.S. bank account, and set up your bookkeeping infrastructure to manage your business finances effectively. This will include accounting, payroll, and tax reporting systems.

 

Understand U.S. Taxation

 

The U.S. tax system is complex, and understanding your tax obligations is crucial for successfully navigating your business journey.

 

We can help you through the tax maze. After all, we are Bradford Tax Institute. We present accurate tax strategies written in plain English for the business owner that are also fully annotated for the tax professional.

 

Read on for a solid understanding of how U.S. taxation will apply to you.

 

The IRS requires all U.S. businesses to have a Taxpayer Identification Number (TIN).11 Corporations and multi- member LLCs must have an EIN.12


Because you as a foreign entrepreneur do not have a Social Security number, you can apply instead for an Individual Taxpayer Identification Number (ITIN).13 You will need to fill out IRS Form W-7,14 which requires documentation that confirms your identity (such as a driver’s license or birth certificate) and your connection to a foreign country (for example, a passport).

 

After receiving an ITIN, you can request an EIN using Form SS-4.15.

 

 

Federal Taxes

 

If you operate your business in the U.S., you may be subject to federal income tax on your effectively connected income (ECI).16

 

ECI is earned from the operation of your business in the U.S. as well as from personal service income earned in the U.S. (such as wages or self-employment income).

 

The income is taxed for a non-resident alien (someone who is not a U.S. citizen) at graduated rates, as for a U.S. citizen, but is limited to the “single’ or “married filing separately” filing statuses.

 

 

The specific tax rates and rules depend on your entity type, the amount of income generated, and any tax treaties between the U.S. and your home country.

 

Here are some key considerations.

 

1.  Entity Type

 

Each entity type has its own tax treatment:

 


Sole proprietorship, single-member LLC, and partnership. If you operate as a sole proprietorship, single-member LLC, or partnership, your business income is taxed as self- employment income on your individual tax return.


C corporation. If you form a C corporation, it’s a separate legal entity. It pays corporate income taxes on its profits before distributing them to its shareholders, who are then taxed on those dividends.

 

Multi-member LLC. The multi-member LLC does not exist for tax purposes. If it does nothing, it’s taxed as a partnership. But it can choose tax treatment as a corporation.

 

 

2.  Residency Status

 

Your residency status impacts your tax obligations. The U.S. taxes residents and non-residents differently.


You are a U.S. resident when you spend a significant amount of time in the U.S. or meet the substantial presence test. With status as a U.S. resident, you pay taxes on all U.S. and non-U.S. income.17 


As a U.S. non-resident alien, you are generally subject to U.S. income tax only on your U.S.-sourced income.18


 

3.  Tax Credits and Deductions

You or your business may be eligible for certain tax credits or deductions that can reduce your overall tax liability. These can include deductions for business expenses and credits for specific activities or investments.19

 



State and Local Taxes

 

In addition to federal taxes, you’ll need to consider state-level taxes. Each state has its own tax laws for income taxes; sales taxes; and other business-related taxes, rates, and filing requirements.

 

Here are some key state tax considerations.

 

1.  State Income Tax

 

Many U.S. states impose an income tax on businesses. The rates and rules vary, and some states have no income tax at all. Others may tax corporate income, individual income, or both.


 The form of your business entity (for example, corporation, LLC, or sole proprietorship) can affect how you are taxed at the state level.


 

2.  Property Tax

 

If you or your business owns or leases real property, you or your business may be subject to property taxes.


Property taxes are taxes levied by local governments, typically cities, counties, and school districts, on real property.  


This includes land and any structures or improvements (such as houses, commercial buildings, and other developments) located on that land.

 

Key points about property taxes include the following:

 

Assessment. Local government assessors determine the value of properties within their jurisdiction. They use the assessed value as the basis for calculating property taxes.


Millage rate. Property taxes are calculated based on a millage rate, which is a rate per $1,000 of assessed property value. For example, if the assessed value of your property is $100,000 and the millage rate is 10 mills, the property tax is $1,000.

 

Ownership. Property taxes are typically the responsibility of the property owner. 

Homeowners, businesses, and landowners are all subject to property taxes.


Payment. Property taxes are usually paid annually, although some localities may allow you to make semi-annual or quarterly payments. The due date for property tax payments can vary by location.

 

Exemptions and deductions. Some jurisdictions offer property tax exemptions or deductions for certain types of properties (for example, homestead exemptions for primary residences) or specific groups of people (for example, seniors or veterans).


Appeals. Property owners typically have the right to appeal their property tax assessments if they believe the assessed value is inaccurate.


 

3.  Franchise Taxes

 

Franchise taxes are a type of business tax imposed by some U.S. states on certain entities for the privilege of doing business or operating within the state.


 Calculation. The calculation of franchise taxes can be based on different factors, such as your company’s net worth, gross receipts, or the number of shares of stock issued. Some states use a combination of these factors to determine tax liability.


Annual requirement. Businesses are typically required to file an annual report with the state’s business registry or Secretary of State’s office, along with payment of the franchise tax.


Exemptions and deductions. Some states may offer exemptions, deductions, or credits for certain types of businesses or circumstances. These can vary widely, so it’s essential to understand your state’s specific rules.

 

 

4.  Occupancy Taxes

 

If your business relates to lodging or hotel accommodations, you may have to pay occupancy taxes. These taxes are imposed by state governments on the rental of:

·          hotel rooms,

·          vacation rentals,

·          motels,

·          inns, and

·          bed-and-breakfasts.

 

 

The taxes are typically added to the cost of the accommodation and collected from guests at the time of their stay.

 

Occupancy taxes are a form of consumption tax (a tax imposed on goods, services, and other items that are sold, exchanged, or consumed).

 

The rates and regulations governing state occupancy taxes can vary significantly from one state to another and sometimes even among different local jurisdictions within a state.

 

5.  State Credits and Incentives

 

Some states offer tax credits, incentives, or deductions to encourage certain types of businesses or economic development in specific regions. These can vary widely and may include credits for job creation, research and development, or investments in specific industries.

 

6.  Nexus Rules

 

States have different rules for determining when your business has sufficient presence (nexus) in the state to be subject to state taxes.

 

You can establish nexus through various means, including having a physical presence (for example, office, warehouse, or employees), making a certain volume of sales, or using in-state affiliates or agents.

 

7.  Multistate Operations

 

If your business operates in multiple states, you may need to navigate complex rules regarding the apportionment of income among states.

 

Apportionment generally refers to the division and distribution of net business income among jurisdictions by the use of a formula containing apportionment factors.

 

In other words, a state determines how much of your earnings are a result of business done in that state so it can charge you the right amount of income tax. This allows you to avoid taxation in multiple states on the same income.

 

 

Sales Tax


 

If your business involves selling goods or services, you may need to collect and remit sales tax at the state and local levels.

 

This would depend on the location and nature of your business activities. Here are some key considerations regarding sales tax.


1.  State-Level Sales Tax

 

In the U.S., sales tax is primarily administered at the state level, and each state has its own sales tax laws, rates, and rules.

 

Some states have no sales tax at all.

 

Tax rates can vary not only by state but also by local jurisdiction within a state, such as counties and cities.

 

This means that the total sales tax rate can vary within a single state, and you need to be aware of the rates applicable to your specific location.

 

2.  Taxable Goods and Services

 

The types of goods and services subject to sales tax can vary from state to state. While most states tax tangible goods, the taxation of services varies widely.

 

It’s essential to understand how your specific products or services are treated in the states where you do business.

 

3.  Sales Tax Collection and Reporting

 

If your business is deemed to have nexus in a state that imposes sales tax, you may be required to collect sales tax from your customers and remit it to the state revenue agency.

 

This involves registering with the state, collecting the tax at the point of sale, and filing regular sales tax returns.

 

4.  Exemptions and Exclusions

 

Some states offer exemptions or exclusions from sales tax for certain types of transactions, products, or customers.

 

Understanding these exemptions and how they apply to your business can help reduce your tax liability.

 

5.  Use Tax


 

Use tax is a complementary tax to sales tax and is typically owed when your business purchases taxable items from out-of-state vendors and doesn’t pay sales tax at the time of purchase.

 

Businesses are responsible for self-reporting and remitting use tax to the state if applicable.

 

6.  Online Sales and Marketplace Facilitators

 

The taxation of online sales and sales made through marketplace facilitators such as Amazon or eBay has evolved, and states have implemented various rules and requirements for remote sellers.

 

Compliance can be particularly complex if you have an e-commerce business.

 

7.  Compliance and Record Keeping

 

Proper record keeping and compliance are essential for sales tax purposes.

 

You must maintain accurate records of sales, exemptions, and sales tax collected, and you must file sales tax returns on time.

 

 

Employment Taxes

 

If you hire employees or engage independent contractors in the U.S., you’ll need to comply with federal and state employment tax requirements.

 

Here are some key considerations.

 

1.  Employment Taxes for Employees

 

Federal income tax withholding. If you hire employees, you are generally required to withhold federal income taxes from their wages based on the information provided by employees on Form W-4.  These withheld taxes must be remitted to the IRS.


State income tax withholding. Each state sets its own withholding tax rate, which is a percentage of your employees’ gross wages. This rate can vary widely, with some states having a flat rate and others using a progressive tax system (a tax rate that increases as taxable income increases).

 

Social Security and medicare taxes.  Both employers and employees are responsible for paying Social Security and Medicare taxes. As an employer, you must withhold these taxes from employees’ wages and also contribute a matching amount. The current rates are 6.2 percent for Social Security and 1.45 percent for Medicare, with an additional Medicare tax for high earners.21

 

Unemployment tax. Employers may be subject to federal and state unemployment taxes, which fund unemployment benefits. The specific requirements and rates vary by state.


2.  Employment Taxes for Independent Contractors

 

If you engage independent contractors,22 you do not withhold income taxes from their payments.

 

Instead, independent contractors are responsible for paying their own taxes. But you may be required to report payments to independent contractors to the IRS using Form 1099-NEC.23

 

3.  Tax Reporting and Compliance

 

As an employer, you are required to file various tax forms, including Form 941 (Employer’s Quarterly Federal Tax Return)24 to report federal income tax withholding, Social Security, and Medicare taxes. You’ll also need to provide an annual Form W-2 (Wage and Tax Statement)25 to employees.

 

4.  Immigration and Work Authorization

 

If you plan to hire foreign workers, you must ensure they have the necessary work authorization and visas to work legally in the U.S. Different visas, such as the H-1B or L-1, may be required depending on the workers’ qualifications and your business needs.

 

 

International Tax

 

Depending on your country of residence or incorporation, you may need to navigate the complexities of international taxation, including tax treaties, foreign tax credits, and import duties.

 

Here are some general international tax considerations.

 

1.  Tax Residency

 

Your tax status in the United States depends on your residency. If you are a U.S. resident for tax purposes, you are subject to U.S. income tax on your worldwide income. The determination of your tax residency is complex and may depend on factors such as the type of visa you hold and the number of days you spend in the U.S.

 

 

2.  Tax Treaties


 

The United States has tax treaties with many countries to prevent double taxation. These treaties can affect your tax obligations and determine whether you are eligible for reduced tax rates or exemptions.

 

Under these treaties, you may be eligible for certain credits, deductions, exemptions, and reductions in the rate of taxes on various items of income you receive within the U.S.

 

Review the specific tax treaty between the U.S. and your country to understand its provisions.26

 

3.  Foreign Tax Credits

 

To prevent double taxation, your home country may offer a foreign tax credit. This credit allows you to offset or reduce your home country’s tax liability by the amount of foreign taxes you have already paid on the same income.

 


4.  Customs Duties

 

Customs duties, also known as “import duties” or “tariffs,” are taxes imposed by a government on goods that you import into a country.27

 

These duties are typically levied at the border when goods enter a country.

 

Customs duties are calculated as a percentage of the declared value of the imported goods (ad valorem duties) or as a specific amount per unit (specific duties).

 

The specific duty is often based on the quantity or weight of your imported goods. In some cases, a combination of ad valorem and specific duties may be used.

 

If you import goods, you are responsible for paying these duties. Customs authorities are responsible for collecting them and ensuring that imported goods comply with applicable regulations.

 

 

Reporting and Compliance


It is essential for you to maintain accurate financial records and ensure compliance with U.S. tax laws. Foreign individuals and entities are generally required to file tax forms and reports with the IRS, such as Form

1040-NR (for individuals)28 or Form 1120-F (for foreign corporations).29 Other forms may include Form 5472 (for certain foreign-owned U.S. corporations).30


 

You may have reporting obligations beyond income tax returns. For instance, if you have foreign financial accounts with a total value exceeding $10,000, you may need to file the Report of Foreign Bank and Financial Accounts (FBAR).31

 

Also, if you own certain specified foreign assets, you may be required to report them on Form 8938, Statement of Specified Foreign Financial Assets.

 

If you have assets in foreign countries, your reporting obligations may be far greater than what you have to report on the FBAR and Form 8938.


 

 

Penalties

 

It’s crucial to stay up to date with tax deposits, filings, and reporting requirements. Failing to comply with your tax obligations can result in

·          penalties,

·          interest,

·          liens on property,

·          loss of property, or

·          revocation of your ability to do business in the U.S. or a U.S. state.

 

 




 


 

 

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