When doing business or investing overseas consider these tax planning decision practices to avoid pitfalls
As a business owner sometimes your endeavors will take you overseas and/or across borders to foreign countries. Situations such as the aforementioned can be both exciting for your business as well as complicated when faced with the compliance and reporting requirements.
For U.S. persons, which are defined as citizens, resident aliens, domestic legal entities, estate or trust, who either do business, live, or have investments outside of the U.S., it is important to understand the compliance requirements that are associated.
New cross border business reporting requirements
Recent legislation has tightened the reporting requirements for cross border/offshore investments, which have thus resulted in additional required information to be submitted with tax return filings. U.S. persons are required to report and be taxed on their worldwide income, therefore foreign income must be included on your U.S. income tax return.
To better understand, there are two types of filing requirements of which are dependent on the types of investments and the value of the investments:
Form 8938 – Statement of Specified Foreign Financial Assets:
- This form is a required part of the annual tax return filing and is due by the tax return filling deadline, including the extension.
- Form 8938 is not required of individuals who do not have an income tax return filing requirement.
- If assets are $50,000 or greater on the last day of the year or in excess of $75,000 at any time during the tax year, the filing of this form is required.
- Failure to file penalties can be up to $10,000 for failure to disclose with an additional penalty up to $50,000 for continued failure to file after the IRS notification of non-disclosure.
- The Threshold for individuals living abroad is $200,000 in value as of the end of the year, or $300,000 at any time during the year.
Form 114 -Fin Cen – Reporting of Foreign Bank and Financial Accounts (FBAR):
- If at any point during the tax year, the value of the assets reaches $10,000, the filing of this filing is required.
- The maximum value of each account maintained at a financial institution must be reported.
- The filing deadline for this form is June 30th of the year following the tax year. Recently, this form can be electronically filed with the income tax return. If the income tax return is on extension, the FBAR must still be filed by the June 30th filing deadline.
Fortunately, the U.S. has tax treaties with most countries; therefore tax credits can be applied on your U. S. income tax returns for taxes paid to other countries.
Lastly, when contemplating making an investment outside of the U.S. it is important to seek the appropriate tax, legal and financial advice. This advice will not only facilitate proper tax planning and decision making but it will also help you avoid the pitfalls of improper reporting and potential non-compliance penalties.
The purpose of this article is to provide general best practice guidelines. This article is not written as legal or tax advice directed at the particular facts and circumstances of any specific person or business. We recommend you consult your local CPA or attorney to ensure your unique and specific needs are fully addressed.
About the author
Stella M. Vida, CPA is a managing member for the firm of Hart Vida Raffo and heads the firm’s accounting and controllership practice. She has over 20 years of public and private accounting experience and has advised clients in the publishing, apparel, manufacturing, retail, medical and professional services industries.
She began her public accounting career at Marks, Paneth and Shron LLP, followed by CBIZ Mahoney Cohen & Company. She was a Senior Accounting Manager at TAL International (formerly Transamerica Leasing) where she was responsible for financial reporting, managing S&A reporting for 10+ global offices, and was involved in the firm’s initial public offering.