Tax year 2016 is coming to a close and it’s the time to do some year end planning for your offshore corporation. Miss out on the FEIE or transferring money between entities, and you could be in for a rude awakening come January.
Year end planning for an offshore corporation is about getting your accounts and records ready for your tax preparer. For information on what IRS forms are required, see: U.S. Tax Reporting for Expats.
The first and most important year end planning for an offshore corporation is around the Foreign Earned Income Exclusion. If you’re living and working abroad, and operating through an offshore corporation, you can exclude up to $101,300 in salary for 2016 ($103,100 for 2017). A husband and wife both working in the business can take out $202,600 tax free.
If you net more than the FEIE, you can usually hold those profits in the foreign corporation tax deferred as retained earnings. You’ll pay U.S. tax when you take a distribution, but you can defer tax for years or decades this way.
Because you will eventually pay U.S. tax on retained earnings, you always want to maximize the the FEIE. If you net $90,000, take out $90,000 in salary on Form 2555. If you net $300,000, take out $100,000 (single) or $200,000 (joint) as salary on Form(s) 2555.
Taking less than the FEIE will always cost you in the long run. If you need to have some capital in the business, max out the Exclusion and then lend the money back to your offshore corporation as a loan from shareholder(s).
Maximizing the FEIE is an important year end tax planning issue. Many small business owners take a minimal salary during the year and have profits inside the corporation. Now is the time to transfer money from your corporation to your personal account as salary… and then back to the corporation as a loan if necessary.
A similar type of year end tax planning for an offshore corporation is for those with U.S. and subsidiaries of their foreign parent company. If you’re using a U.S. corporation as your billing entity, and have no U.S. offices, employees, and no U.S. source income, then you need to transfer any profits in the U.S. company to the offshore company before year end.
Any income left inside the U.S. corporation might be taxed in the United States. Moving foreign source income to your offshore corporation will simplify your U.S. reporting.
Once you have your cash where it needs to be (in your offshore corporate account or the FEIE in your personal account), you can generate reports for your tax preparer. He or she will need a balance sheet and cash flow statement for each entity.
They will also need to know if any shares were sold during the year or any significant changes to the ownership structure. If this is your first year reporting an offshore company, your preparer will need your company documents, registered agent, and shareholder information.
Finally, your preparer will need your banking information for your Foreign Bank Account Report (FBAR). This includes the name and address of each foreign bank, your account numbers, and the highest balance in the account during the year.
An FBAR is required if you have more than $10,000 offshore, even if for only one day. Your preparer will also report your offshore account on Schedule B of Form 1040.
With this, you’re ready for year end and tax filings next year.
I hope you’ve found this article on year end planning for an offshore corporation for U.S. expats to be helpful. If you would like assistance reporting your international structure, please contact me at firstname.lastname@example.org. I will introduce you to a U.S. licensed tax preparer experienced in offshore tax matters.