What The New Tax Laws Mean For Us Americans Offshore
I’d say the United States now has more tax filing deadlines than national holidays.
Today, Oct. 15, is another one.
Everyone knows April 15. That’s the deadline for filing your personal tax return each year. This year this deadline actually fell on April 17, thanks to a weekend and a holiday.
The initial filing due date for partnerships and S corps is March 15.
Then you have the extension deadlines, which are six months from the original dates.
We expats have a later first filing deadline. Our due date is June 15… unless we file an extension by the April 15 deadline. In that case, we have until Oct. 15 to file our returns.
In fact, there’s another filing date for expats that I’ve tried to ignore over the past two decades I’ve been an expat. I didn’t want to give myself any additional opportunity for procrastination…
However, it is possible as an expat to request a further extension until Dec. 15 if you have a legitimate reason for not being able to complete your return in time for the earlier deadlines.
This year, any expat with a business offshore likely has the same legitimate reason—the new repatriation tax created by the Tax Cuts and Jobs Act passed last December.
The new law was intended to target big U.S. corporations with billions in offshore profits that hadn’t yet been taxed and that wouldn’t be taxed until the funds were reverted to the United States.
While the law was meant to force big-deal companies like Google to bring their profits home and pay the associated taxes due, it isn’t limited in that agenda.
It Affects Every American-Owned Offshore Business.
The unintended consequences of this broad and hastily approved tax change are proving (not surprisingly) to be more than most people could have predicted and than anyone, including the IRS, is ready to address.
One important cause for confusion is that the new requirements aren’t applied in the same way to individuals as they are to corporations. And, again, even the IRS isn’t 100% certain how best to comply in one case or the other.
The IRS has created Publication 5292 to help with the calculations… but it’s not much help. You (or your tax preparer) have to read through the pub and then work backward through the worksheets. Figures required for Worksheet A come from Worksheet B… some of the required numbers for which come from Worksheet C… and so on.
Add to that typos in Pub 5292 referencing columns in the worksheets that don’t exist.
How am I so well acquainted with the agonies of trying to comply with these new tax laws?
I’ve spent the better part of the past six weeks wading through the process.
I admit it. I’m stuck. And I know more about this stuff than most professional offshore tax preparers. If you’re a fellow American with a business offshore… I feel your pain.
The root of the problem is the citizenship-based approach to taxation that the United States takes. A German citizen living outside Germany has neither a tax-filing nor -paying obligation to Germany unless he generates revenue in Germany. A German’s tax obligation belongs to the country where he is living.
Makes Sense, Right?
Because the United States taxes based on citizenship rather than residency, the IRS has come up with mitigating rules, including the Foreign Earned Income Exclusion, for example, which allows an American overseas to exclude up to US$104,100 in earned income (that’s the figure for 2018), and the Foreign Housing Exclusion, which allows Americans who are renting while living and working abroad to exclude their rent, when figuring taxes owed to Uncle Sam.
Until last December, the U.S. government also allowed Americans who own businesses in other countries to defer taxes on profits until the funds were paid out in some form. In the case of big corporations such as Apple that meant their subsidiaries paying dividends to the American parent corporations.
However, instead of paying dividends to U.S. parent companies, Apple has chosen, in the interest of expanding its business, to borrow money in the States and to keep offshore profits offshore.
The new tax law forcing them to repatriate those profits and pay taxes on them may seem like a good idea, but I don’t think anyone involved with the legislation thought through the consequences for the little guys.
Most small businesses owned by Americans offshore aren’t sitting on bucketloads of cash. They use their profits for growth—reinvesting in their businesses, purchasing productive assets, etc.—and to pay taxes in the countries where they are operating.
Unfortunately, though we American expats living and running businesses overseas pay taxes in the United States on our worldwide income, we have no voice in Congress. Nobody is lobbying for our rights.
I think it’s what we Americans have referred to in the past as taxation without representation.
What's An Expat Business Owner To Do?
Hunker down and push through Pub 5292. I’m right there alongside you, doing the same.
Meantime, if you, like me, are stuck, send in a letter to the IRS requesting one more extension until Dec. 15.
The deadline for that is today. I sent mine off via FedEx this morning.