U.S. Small Business Accounting for International Investors
The following is an excerpt from the U.S. Small Business Accounting For International Investors Webinar with H&CO. Global CPA Firm
U.S. Non-Resident Alien Important for Tax Considerations
You might be thinking, “I don’t have a green card or I don’t have a U.S. citizenship, so I’m automatically a non-resident.” So, we talk about this as…from the individual standpoint, if you’re someone that holds a different passport, or you’re here on a visa, we would like to dive into basically how much time do you spend in the United States to determine if you’re going to be considered a non-resident alien, which is an important factor for tax considerations. We’ll use some terminology throughout the presentation as non-resident alien, NRA, which is our international investor, or a foreign corporation, signified as FC, that would be a foreign company doing business in the United States, which happens. So, it’s extremely common. Why? Because the United States is actually a very easy country to start doing business, open a bank account, invoice through the United States. So these are all key elements. And you can get paid in the United States. So, a lot of big corporations or well-established businesses abroad can come to the United States and establish one feature of their business service here.
Taxes in the U.S. for International Investors
So, what would you be taxed on as a foreign company or foreign type entities? You would be taxed on information such as income that you derive from doing business in the United States or effectively connected income. And I’ll dive into that in a little bit more specific so that you can understand what I’m talking about. This is just a definition from the Internal Revenue Code. So, our typical international type of income that would be derived in the United States by foreign investors would be taxable, something such as services. If you come to the United States and you’re physically present, you have an office here, you’d be able to have a co-working space and have a business, and you can provide services in the United States. But it doesn’t mean that legally…you live here. But that would be taxable. So then that is taxable to a non-resident alien. Or if you have a property that you decided to invest in, and you decided to rent that property, that rental income, you would have to report that on an income tax return. And we would dive into how that would be treated. Capital gains treatments. “Oh, I have a property that I go to vacation in the United States.” Since it’s located in U.S. territory, and if you hold that property for more than a year, your taxed on…it’s called capital gains because you had a U.S. asset that derived income, and you held it for more than 12 months, and then we will pay capital gains to the United States. This is all on assets or income that you derive in the U.S. Okay. So you can either be here physically providing services or have an office here and have payroll, and that source income that you derive would be taxable to the U.S.
So, in the United States as a foreign investor, it’s very relevant that you take into consideration that there’s income tax and that there is estate tax. So estate tax also is a very important factor because as non-resident aliens, NRAs, foreign international clients, you are on your U.S. assets subject to estate tax or even a filing requirement when the owner of that asset passes away. So as a non-resident, you have a $60,000 exemption from your fair market value of the asset, which is what was that asset worth at the time of death, and that depending on that lump sum, if it’s greater than $60,000, you would have estate tax due. You’d have to pay money to the IRS so that that asset could be passed on to the beneficiary. So this is important so that you have all the information necessary to make an educated decision. And there is estate tax planning that you can do. There are strategies that you can implement. But we really just want to make sure that you know that there is that exposition, that you are exposed to estate tax. And a simple example would be real estate property in the United States. The shareholder or the owner of that property, depending on the structure, would…if you’re non-resident alien and you pass away, that property would have estate tax.
The U.S. Accounting System
So, what I really wanted and I thought would be valuable for everyone to understand is that accounting is the foundation of any business, right? And every country has different legislation, different requirements, and obligations for accounting and tax. So for the U.S., our accounting system is based on income minus expenses equals their profit, the same everywhere else, except we get to deduct a lot of business expenses in the United States. We’re very flexible with that. So it’s very important to have some control over your finances, understand where you’re spending money, understand if I should use the company card or use my personal card to expense things. So I wanted to share a brief example because I thought it would be just a little visualization so that we could skim through a design landscaping business, and you can see how the income is separated between the different services. We do have expenses. Anything related to that income would be able to be expensed through the business. So we’re talking about marketing, advertisement. If you paid for a company to come and do some consulting services for your business strategies. If you have, like in a design and landscape service, a vehicle that you use to provide those services, you can include your lease…your car lease and your car insurance as long as it’s related directly to the business operation. Big expense for companies in the United States is payroll. Payroll, you get the actual wages deduction that you pay your employees, the payroll taxes, legal and professional services. So our accountants would get paid. Your attorneys would get paid. Anyone that provides a service for your business would be included there, if you have rent, utilities. Why is this…why am I focusing so much on this? Because we really want to emphasize business expenses.
The Importance of Business Expenses
I highly emphasize that you use your company card or credit card solely for business expenses and not try to, “Oh, I’m going to go purchase a designer fashion bag, Louis Vuitton.” That would not be deductible. We can’t deduct that on the accounting. So that won’t affect your bottom line. So, we just want to make sure that we’re all on the same page. And here you’ll notice that 27,000 is the net profit. In the United States, you will always get taxed on your net income. Okay. It’s not taxed on your gross income. It’s always the net. So that’s why it’s important for you to see, depending on your business model, how can you maximize your expenses. That would be the primary focus of the accounting, and having a good accountant that you can call and exchange an idea, have your accounting up-to-date, check out your profit and loss. Those are very important features when you open a company and you’re going to have an operational business. In the United States, you also do not have an accounting requirement to have your accountants…your books closed on a monthly basis. That is like an internal control feature that you could determine for your business. So there’s nothing in the law that states that it has to be financially closed at a certain frequency. Okay. But again, we’ll analyze your business model throughout in a conversation to see what key features pertain to your business, and we’ll give you some guidance based on that.
How much tax do I have to pay?
Usually, after I mention that we get taxed on net income, the follow-up question generally is, “How much tax am I really going to have to pay?” I think that is everyone’s major concern. We can dive into that a little bit more in-depth. And I’m sorry to say that it really depends on a number of factors that we have to take into consideration, which is basically what’s your ownership structure? How is your investment structured? So, there are numerous different strategies that can be implemented. I wouldn’t say one is better than the other. Each one has pros and cons, and we’ll go into each explanation. I’m showing you three major structures that’s commonly used in the United States that I’ll go over. But just to have as a reference, I’m sure many of you have heard of limited liability companies, which is an LLC, the acronym LLC, a U.S. corporation, which would have an incorporation, or an Inc., or you can do business as a foreign corporation, or at your individual level as a non-resident alien. So, there are numerous structures, and we can find out what’s best for you. You have to take into consideration many factors if you’re planning on working with Visa Franchise because you want to invest in a franchise and seek an immigration visa. So they’ll be able to review that information with you and guide you through that process. And we would guide you through the tax process. So, there are specific structures that apply to specific visas. So, this is just a very general conversation. But it’s really important to get involved with your accountant, your attorney, your service provider that’s assisting you with identifying a business. So, keep good professionals close. That’s very, very important for you.
So, the question of the hour, “How much tax do I pay?” So just so you have an idea, in the United States, we have tax tables. So, depending on your structure, if you pay tax at the individual level, you’ll get applied to this tax table. And this tax table for non-resident aliens, I know you see two columns. But the one for singles would apply to the non-resident alien. So, how do I determine that? I’ll get into that later. But I just wanted you to have this as a reference that as a non-resident alien, even if you’re married, you can’t file together as a non-resident alien. That’s why you would fall within the column one. In the United States, if you pay tax at the individual level, you’ll pay tax at a graduated tax bracket as you can see here. It goes from 10% to 37%, and it’s gradual. So, let’s say you had $10,000. The first row is up to 9,875. So, that amount would be taxed at 10%. The remaining amount would be taxed at 12%. And that’s how we can get to the bottom line of how much tax you owe. I did include some other reference points for you as well. Perhaps there’s a U.S. tax resident listening in. As a U.S. tax person and you’re married, you could file jointly and get a benefit of a wider range, and you also would qualify for this standard deduction, which reduces your tax base. So if in my calculation you owed $50,000, we would be able to reduce…not owed. If your taxable income was $50,000, we would reduce that by the standard deduction for tax purposes. And then based on that, we would apply your taxable income to this tax bracket. So there are a bunch of little steps. It’s not very direct, but this is basically what your guidelines would be.
United States Tax Rates
And you can only pay tax in the United States at two levels, either the individual level or at the corporate tax rates. So, what is the corporate tax rate? I’m happy to say, well, 21%, 21%, which has brought a lot of U.S. investment here. A lot of corporations that might have had their headquarters outside of the United States decided to start bringing business and their corporation headquarters to the U.S. because we’re technically a low-tax jurisdiction now for U.S. corporate tax rates. It’s a flat tax of 21% for the federal government. A parenthesis or an asterisk that I would put here, we do have 50 states in the District of Columbia and Puerto Rico. Every state has their own state tax rules. So, we have to keep in mind that whenever you’re coming to the United States to do business here, you do want to take into consideration, what state are you doing business in? Maybe that’s something that is not…you’re not 100% certain on and that you could make a decision based on tax, which is fine. Maybe instead of living in California, maybe you’ll come to Florida, or instead of going to Texas… I mean, either, way we can look at it on a case-by-case basis and see if there’s any tax implication to open a small…open your location or where your offices are going to be located. So we’ll take all of that into consideration.
E-2 Married Couples Filing Jointly
Patrick: Hey, just a quick question, Alexandra. Do you have married couples that… So say someone’s on an E-2 visa, they’ve been in the U.S. for two years. Is there any reason they would not file jointly as a married couple, and they would file individually?
Alexandra: To be honest, in my experience, as long as they meet the Substantial Presence Test or the E-2 visa, they’re allowed to file jointly. And it does give a greater benefit for the couple that is filing jointly because you have a wider tax range and a higher standard deduction. As you can see in this one that I was showing earlier, it’s actually doubled. So you do have a greater tax benefit. However, there are clients that really would like to know how much they will owe individually, and they want to file individually so they keep their income taxes separately. There’s no tax benefit to that. That’s more of a private reason.
Patrick: Okay. There’s a privacy choice.
Patrick: Okay. Thanks. I appreciate that.
Foreign Investors Business in the United States
So doing business in the United States. Foreign investors. You can be a foreign investor, open a company and have payroll. Okay. If you don’t have the work permit, you’re just the investor, you can’t be on payroll, but you can hire other people to run your business, and you can do that from afar. I just wanted to include this so you have an idea of what type of tax that would be included.
The standard payroll taxes that you’d have to account for, which would be an expense on your behalf as the employer, would be the Medicare, which, in total, is 2.9%, but the employee also contributes. The employer and the employee will contribute 50% each. Your responsibility as an employer and for your company will be 1.45% related to Medicare. And that is on the entire lump sum of wages that you pay, the salaries that you pay your employee that’s registered under your business. Also, there’s a social security tax. That phases out after a certain amount, so depending on how many salaries the employee gets paid during the year, if it exceeds $137,700, that’s adjusted for inflation every year. So that number is for 2020. The whole liability is 12.4%, but as the employer, you’re only responsible for half of that. So that’s 6.2%. This is the main like bulk of the payroll taxes that are for contributions for the federal government. So in total, you’re going to be paying 7.65% in payroll taxes. However, you do have to consider the unemployment contributions. Federal, you only pay 0.6% up to the first $7,000 in the year, then it varies per state. I included Florida because we’re located in Florida. I just thought it would be more relevant just to have that as a point of reference. But if you have another state that you’re curious or that you’re planning on having an employee, we can certainly give you more details based on location. We work with the entire United States territory. You do not have to be located in Florida to work with us or for us to give you some assistance.