Moving overseas

[minli98]

Hi,

I have this issue I hope I can get some help in: two partners (husband and wife) of a LLC decided to move aboard for family reason, leaving the third partner to run the business. The husband and wife will do some amount of work from overseas by phone/online. They plan to come twice a year to visit the business.

1. Can they expense the cost of their travel to visit the business?

2. Would they still have to pay Self Employment Tax?

Thank you!

[Kram BergGold]

My 2 cents

If they establish a tax home abroad because they are working there, then I would say the trips are deductible. If they are just on an extended vacation then I would say not deductible.

I don't believe the law has ever been clarified as to the taxation for SE purposes of LLC members so I won't attempt an answer.

[JG EA]

"If you are a US citizen...the rules for filing income... tax returns are generally the same whether you are in the United States or abroad." Pub 54

It also say SE taxes are required.

Of course if they meet the rules for Foriegn Earned Income there is an exclusion. But this is an area I am researching for a tax return that I do. Is working on the internet for US Source income change your tax home when your computer in another country? In other words they are not in the other country to work, just live in another country and keep their business going on the internet. I don't know the answer yet on that.

[Roberts]

If they earn more than the foreign income exclusion ($91,500 for 2010), they are required to pay US taxes (they are required to file even if they earn less than the exclusion amount). Keep in mind, they must include all foreign investment income - not limited by the exclusion.

An odd point though is that the exclusion will exclude earned income but it will NOT REDUCE self employment taxes.

To me for the tax deduction of airline tickets, I think it would solely be a case by case matter. I tend to deduct airfare in the same way airfare is deducted for an American taking a flight to Italy for a seminar.

For this: Is working on the internet for US Source income change your tax home when your computer in another country?

If you are in a foreign country and work in the foreign country via the internet, your tax home is in the foreign country. I don't think it matters where your server is located. I know an American in Argentina that does 100% of his work for US companies via an internet connection. His tax home is in Argentina.

http://www.irs.gov/publications/p54/ch04.html

[minli98]

Hi Roberts,

Just to clarify: If the partners take on work overseas, would they have to pay self employment taxes on that income? What if they already have to pay the local domicile's equivalent of social security tax?

Thank you!

If they earn more than the foreign income exclusion ($91,500 for 2010), they are required to pay US taxes (they are required to file even if they earn less than the exclusion amount). Keep in mind, they must include all foreign investment income - not limited by the exclusion.

An odd point though is that the exclusion will exclude earned income but it will NOT REDUCE self employment taxes.

[Roberts]

Hi Roberts,

Just to clarify: If the partners take on work overseas, would they have to pay self employment taxes on that income? What if they already have to pay the local domicile's equivalent of social security tax?

Thank you!

Whether the work is really in the US or for a foreign company shouldn't matter. If you are self employed, you owe SE taxes regardless of whether you are based in the US or in a foreign country. Personally, I'd find alternatives to being self employed.

Here is exactly what the IRS says "If you are abroad and you are a self-employed U.S. citizen or resident you generally are subject to the self-employment tax. This is a social security and Medicare tax on net earnings from self-employment of $400 or more a year. Your net self-employment income is used to figure your net earnings from self-employment. Net self-employment income usually includes all business income less all business deductions allowed for income tax purposes. Net earnings from self-employment is a portion of net self-employment income. This amount is figured on Schedule SE (PDF). The actual self-employment tax is figured on net earnings from self-employment."

If you are subject to a duplicate program in a foreign country, you are supposed to contact US Government about the possibility of receiving a waiver from double taxation. Contact:
U.S. Social Security Administration
Office of International Programs
P.O. Box 17775
Baltimore, MD 21235-7775