In addition to filing a US individual tax returns, expats may have other filing requirements if they operate a business or have investments in a business entity.

The most common forms of business are:

Sole Proprietorship/Self-Employed

A sole proprietor is a self-employed person who owns an unincorporated business and is conducting business by himself or herself. US nationals who are conducting business as sole proprietors outside of the US must:

  • File Form 1040 – U.S. individual tax return. Self-employed taxpayers must file a US income tax return if net earnings from self-employment were $400 or more.
  • Must use Schedule C (Profit or Loss from Business) to report business activities.
  • Must pay income tax on self-employment income.
  • May claim the foreign earned income exclusion, the foreign housing deductions, and or the foreign tax credit to exempt income from income tax.
  • Must pay self-employment tax (Social security and Medicare) on business income unless there is a social security agreement between the host country and the US.
  • Must report all business and personal accounts according to FATCA and FBAR regulations if the total value of all accounts meet the filing thresholds established by the IRS.

Corporations

In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock.

For US income tax purposes, a corporation is recognized as a separate taxpaying entity and if it is not conducting business in the US, the foreign corporation by itself does not have any income tax requirements with the US. However US shareholders of a foreign corporation have to:
  • Report the income received from the corporation.
  • The foreign earned income and housing exclusions cannot be claim on dividend income received from the corporation. Only the foreign tax credit is allowed.
  • The foreign earned income and housing exclusions can be claimed only if the individual received compensation from the corporation as an employee.
  • Must report all corporate and personal accounts according to FATCA and FBAR regulations if the total value of all accounts meets the filing thresholds established by the IRS.
  • Must file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, if the filing requirements are met.

Partnerships

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

Although the partnership generally is not subject to income tax, you are liable for tax on your share of the partnership income, whether or not distributed. The tax treatment of the income generated by a foreign partnership will depend on if you are an active participant in the daily activities of the partnership.

If you are not an active participant and the business decisions are taking by somebody else, the tax treatment of the partnership is as follows:
  • Income generated by the partnership will be considered investment income
  • The income cannot be excluded using the foreign earned income and housing exclusions.
  • The Foreign tax credit may be claim to claim credit for the taxes paid to a foreign country on the income generated by the partnership.
  • Must file Form 8865, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, if the filing requirements are met.
On the other hand, if you are an active participant the US tax treatment of the partnership interest is as follows:
  • Income generated by the partnership will be considered self-employment income.
  • May claim the foreign earned income exclusion, the foreign housing deductions, and or the foreign tax credit to exempt income from income tax.
  • Must pay self-employment tax (Social security and Medicare) on the partnership generated income unless there is a social security agreement between the host country and the US.
  • Must report all partnership and personal accounts according to FATCA and FBAR regulations if the total value of all accounts meets the filing thresholds established by the IRS.
  • Must file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, if the filing requirements are met.