When you are self employed and have your own business abroad most of the same rules apply that apply when in the USA. Many overlook deductions and expenses which may reduce your taxable income and social security payments to US (if required). Some of the expense rules applicable to your US income tax return may be different than those in the country in which you operate your business. See below for guidance.
Business expenses. Business expenses are usually deductible if the business operates to make a profit. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that’s common and accepted in the trade or business. A necessary expense is one that’s helpful and appropriate for the trade or business. An expense doesn’t have to be indispensable to be considered necessary. Business expenses include:
- Business use of a home – If a taxpayer uses part of their home for business, part of their home expenses may be deductible. These expenses may include mortgage interest, insurance, utilities, repairs and depreciation. Alternatively, a simplified method is available for figuring this deduction. Special rules and limits apply. See Publication 587 for details.
- Business use of a car – If a taxpayer uses their car in their business, they can deduct car expenses. If they use it for both business and personal purposes, they must divide expenses based on actual mileage. For details, including special recordkeeping rules, see Publication 463.
- Meals and entertainment – In general, taxpayers can deduct 50 percent of the cost of business meals if the taxpayer -- or an employee of the taxpayer --is present and the food or beverages aren’t lavish or extravagant.
- Rent expense – In general, a taxpayer can deduct rent as an expense only if the rent is for property used in their trade or business. If they have or will receive equity in or title to the property, the rent is not deductible.
- Interest – Business interest expense is an amount charged for the use of money a taxpayer borrowed for business activities. Limits and special rules may apply. See basic questions and answers about the limitation on the deduction for business interest expense for more information.
- Taxes – A taxpayer can deduct various federal, state, local, and foreign taxes directly attributable to their trade or business as business expenses.
Publication 535, Business Expenses, has more information about these and other deductible business expenses, including employee related expenses such as employees’ pay, retirement plans and insurance.
You may owe US self employment tax (medicare and social security) on your net business income if the US does not have a social security agreement with the country you live in or if you are not paying into that countries social security system. Many countries do not have such agreements with the US.
We can help with your nonresident, international and expatriate tax planning, tax returns and IRS issues, audits, payment plans and citizenship surrender. Email us at Expatriate Tax Help Now. US Tel. 949-480-1235
