How Does US Tax Entrepreneurs on Overseas Income and Assets?

How Does US Tax Entrepreneurs on Overseas Income and Assets?

Entrepreneurs & US Tax on Overseas Income

How Does US Tax Entrepreneurs on Overseas Income & Assets: Oftentimes, when US Persons hear the term “offshore” or “foreign reporting,” they imagine the IRS is only referring to monies stashed away in typical haven countries or passive income (and not earned income) — but unfortunately neither of that is true. In the past 10-years, the Internal Revenue Service and DOJ have significantly increased enforcement of the international information reporting requirements, such as reporting foreign income, assets, accounts, investments, gifts and more. Entrepreneurs spend their days thinking, living and dreaming about business — how to improve their product, enhance their marketing and make their business better. Who has time for IRS reporting, right?

We get it, so we created a brief introductory guide to help:

US Taxes Entrepreneurs on Worldwide Income

The US tax system is different than most other countries and that even if you do not reside overseas — but are earning income from overseas — it is reportable to the US government even if it is not repatriated (most of the time). And, taxes on worldwide income is not limited to just US Citizens. Rather, the United States taxes US Persons on their worldwide income. It is important to note that the definition of the term US Person is not limited to US Citizens — it also includes Lawful Permanent Residents and non-permanent resident to meet the Substantial Presence Test. 

Foreign Bank Accounts and Assets

One of the biggest enforcement priorities for the Internal Revenue Service is the international information reporting requirements. US Person Entrepreneurs who have foreign accounts and assets may have significant reporting requirements in addition to their US tax return, including reporting their foreign assets and accounts on:

  • Form 3520
  • Form 3520-A
  • Form 5471
  • Form 5472
  • Form 8621
  • Form 8865
  • Form 8938

The failure to timely file these forms may result in significant fines and penalties — although oftentimes the penalties can be minimized and eliminated through the offshore amnesty programs.

Foreign Investment Fund Tax & Reporting

Investment funds also require disclosure to the US government. Depending on the type of fund, the level of reporting can be complex — especially when there are investment funds that qualify as PFIC.

Entrepreneurs with Accrued vs Distributed Income

In general, accrued passive income that an Entrepreneur earns on foreign investments is taxable in the United States when it is accrued. For entrepreneurs who formed corporations and other entities outside United States — they too may have to report their ratable share to the US government when the income qualifies as Subpart F.

Foreign Tax Credits: Net vs Gross

When an entrepreneur turns money overseas but has already paid taxes in a foreign country, they may qualify for foreign tax credits — which can be used to reduce and sometimes even eliminate any US taxes due on the income. The foreign tax credits or not always a dollar-for-dollar credit — and there are other limitations and exclusions to consider.

GILTI Headache for Entrepreneurs

GILTI refers to the Global Intangible Low-Taxed Income rules came into effect in accordance with TCJA (tax cuts and jobs). GILTI is very complicated — but form a baseline perspective — income that is earned in an overseas CFC (and is not Subpart F) may still be taxable in the United States even before it is repatriated. There are certain exceptions and limitations — and corporations (and some individuals who would benefit from an 962 election) may be able to eliminate GILTI Tax.

Subpart F

There are various different categories of subpart F income, but the most common type of Subpart F Income is passive income. When a Controlled Foreign Corporation (CFC) — foreign corporations owned primarily by US persons — generate certain passive income in a year that they meet the E&P threshold, it may result in the US person having to pay tax on their proportionate share of income — even though the income was not distributed to the taxpayer.

International Tax Amnesty Programs

For US Entrepreneurs and other Taxpayers who are out of compliance for their international reporting requirements may be able to safely get into compliance using to one of the approved offshore tax and reporting amnesty programs:

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