There are many possible pitfalls in being an expat and an entrepreneur. One we can all relate to is how to best file U.S. Taxes when living abroad. In this part of a three part series on US Taxes and Expats, I went to an expert for some advice.  Joshua Katz is himself an entrepreneur and expat his firm Universal Tax Professionals is a boutique agency specializing in US taxes for Americans living abroad.  They promise great service at the fair price.  Please note this is not sponsored content, as I had just finished ripping out clumps of my hair trying to find out what happened to the 2015 return, I joined a Facebook group US Expat Tax Questions. I noticed Joshua’s answers were easy to understand and I approached him about creating a series for entrepreneurs and other expats who do fit so squarely into a TurboTax auto fill form.

Q: What accounting system do you recommend?
A: This really depends on an individual’s needs.  There is not one software system which is perfect in all circumstances.

Q: When is it time to contact someone like you?
A:  As soon as you are ready to file your taxes or as soon as you have found out you need to file your taxes.

Q: Can I still file for an extension in early April?
A: Now it’s too late. However, expats have an automatic two-month extension until June 18th.

Q: Should I be charging “tax” on services/products that I sell or provide overseas?
A: That depends on which country or state you are living in.

Scenario 1

I decided to incorporate my foreign business. How will this affect my US taxes? While this may not affect your US taxes directly, you are now required to file a Form 5471.  This form can be confusing and time-consuming. There is also a large IRS penalty for not filing this form. In addition, your accountant will charge an extra fee for filing this form.  Make sure to tell your accountant if you own a foreign corporation.

Scenario 2

I am an American citizen with clients. I do business with my social security number. I spend less than 30 days per calendar year in the United States.

Q: Do I need to fill state taxes from the last place I lived in the US? i.e. where my driver’s license is issued or where I own property.
A: Some states “yes” and some “no.” For example, California requires you to file state tax returns if you have a driver’s license, own a house and plan on returning. Each state has its own laws in this regards, however, most states would not require you to file a state tax return if you did not live in the State and did not do business in the state.

Q:I am issued 1099s can I deduct my office space, coworking membership, the internet, mobile, etc. i.e. As I would if I were in the States?
A: Yes, you can deduct any kind of expense that was used in the ordinary course of the business regardless where the expense was incurred.

Q: Do I have to pay the penalty for not carrying American health insurance?
A: Not if you live outside the US. There is an exemption for non-residents.

Q: I am issued W-2s for remote work—taxes are taken out, am I entitled to a refund?
A: Possibly, it will all depend on the amount of exemptions and other deductions / standard deduction / itemized deductions that you are claiming on your tax return.

Scenario 3

I am an American with a small business and an EIN (TIN). I have a mix of American and foreign clients. My company is registered in the United States and in a Tax-free zone (i.e. Media City, Dubai) overseas.

Q: I hire local staff. Am I responsible for paying American taxes for them?
A: This depends if they are considered employees or they are freelance workers. It would depend if under contract law you have an employee/employer relationship with them. If yes, then you need to withhold taxes from their paychecks. This applies to US residents. For overseas residents, you will not need to deduct taxes from their salary, but if they are US citizens you may still need to issue them a W2.

Q: How do I declare the money paid to foreign nationals?
A: They would be classified as regular expenses just as if they were paid in the US . If they are US citizens you will also need to issue them a 1099.

Q: Should I issue 1099s or 1023s for the Americans who work for me?
A: Yes , regardless of where they live.

Q: What do I do about the taxes I pay to local government or workers such as VAT or income taxes?
A: They can be deducted and depending on the type they may be used as a credit to your US tax liability.

I am a US CPA from Cleveland, Ohio. I graduated with a degree in accounting from Boston University’s School of Management and worked at Deloitte and Touche and Crowe Horwath before starting Universal Tax Professionals, a firm dedicated to the needs of Americans living abroad. I am currently living with my wife in Jerusalem and I enjoy traveling in my spare time. You can reach me by email if you have more questions.

The comments section is open and Joshua is on Facebook. You can @mention him in the comments or email him directly from the link on his website.