How Founders Abroad File U.S. Company Tax Returns

Incorporating in the United States as a founder based outside of the U.S. is both exciting and challenging. Beyond the promise of expansion and market access, you will encounter a complex tax system that demands a thorough understanding of federal, state, and local obligations. Choosing the right entity and tax designation becomes essential not only for compliance but also for optimizing financial outcomes.

In this guide, we delve into the nuances of entity types such as LLCs, corporations, and partnerships, as well as tax designations that shape how profits are reported and taxed. From filing the correct federal forms to taking advantage of credits and deductions, you will gain the insights necessary to manage your company’s tax responsibilities effectively. Let this serve as your roadmap, helping you navigate U.S. taxation with confidence.

Entities vs Tax Designations

Entity types and tax designations are two concepts that often overlap but serve different purposes. While entity refers to the legal structure of your business, tax designation determines how the IRS taxes your business income. 

Here’s an example to depict how an entity differs from tax designation. 

An LLC is a legal entity, but it doesn’t have a fixed tax designation. It can be taxed as a disregarded entity (default for single-member LLCs), a partnership (default for multi-member LLCs), or a C-corporation (if elected).

There are two entity types by which a non-U.S. based founder can register their business in the country..

1. Limited liability company (LLC) is one of the most popular entity types for non-U.S. based founders that provides liability protection. When you register as a LLC, you, as a member (owner), are not personally responsible for your company’s debts or obligations. This is what’s known as the “corporate veil” and applies to both LLCs and Corporations.  
2. A Corporation is a legal entity separate and distinct from its owners. Its shareholders profit through dividends and stock appreciation but are not personally liable for the company's debts.

Tax designations determine how the IRS treats entities for tax purposes. Remember, tax designations aren’t tied to your entity type. 

Similar to entity types, there are three primary tax designations available for founders abroad:

1. Single-member LLC is an LLC with just one owner. For tax purposes, it’s treated as a ‘disregarded entity’ by default. This means that the IRS doesn’t tax the LLC as a separate entity; instead, all income, expenses, and profits are reported directly on the owner’s personal tax return.
2. Multi-member LLC is owned by two or more members and is taxed as a partnership. Each member reports their share of the LLC’s income on their personal tax return based on ownership percentage.
3. C-corporation applies to corporations and LLCs that elect to be taxed as corporations. Unlike multi-member LLCs, the C-corporations pay corporate income taxes on their earnings. 

As a non-U.S. based founder, selecting the right entity type and tax designation is key for managing compliance and optimizing taxes. For instance, an LLC offers flexibility, but pass-through taxation might expose you to reporting requirements in your home country. 

Always remember to get an expert opinion before choosing the entity type and tax designation.

Non-U.S. Based Founders Tax Filings: How It's Done

As a non-U.S. based founder, filing taxes might overwhelm you. You need to fill out several forms and stay updated with regulations all the time. Over the years, we’ve helped several non-U.S. based founders file taxes, so we know what forms a non-U.S. based founder has to file depending on the type of entity and tax designation you choose.

Let’s start by discussing the different forms you might need for federal tax filing.

Filing federal tax return

Here’s a list of forms a founder abroad must know about when filing taxes for their company:

• Form 5472 is filed by U.S. corporations with 25% or more foreign ownership or foreign corporations that do business or trade in the U.S. 
• For corporations and LLCs taxed as C-corporations, file form 1120 to report business income, expenses, and tax liability.
• If your business pays independent contractors or service providers in the U.S., fill out form 1099-NEC and form 1099-MISC for other miscellaneous payments.
• Partnerships, including multi-member LLCs, must file form 1065 to report their income and expenses. Each partner in the LLC needs to fill out a schedule K-1 that tells the IRS about their share of the business’s profit or loss.
• Some states and cities have separate tax filing requirements. For example, Delaware or California require annual franchise tax payments or specific forms, even for foreign-owned entities.

While understanding the basis of tax filing is a necessity, your best move is to hire a professional to do the tax filing. That’s where an accountant or software like Firstbase Tax Filing can help you. With Firstbase, you can connect with our bookkeepers via chat or by booking a call at a time that works best for you and ask them all the questions you have about tax filing. 

Documents needed to file taxes in the U.S.

To fill out all these forms and to file taxes, you will need a lot of documents. It’s better to keep them ready well in advance so you are better prepared when the tax season arrives. The documents needed to file for a non-U.S. based founder vary based on the type of entity you own, but here are the five must-haves:

• Employer identification number (EIN) is essential for filing tax returns and identifying your business with the IRS.
• Financial documents like income statement, balance sheet, and cash flow statement to report your company’s financial activities for the year.
• Proof of ownership is required to show your role as the owner or shareholder in the company.
• Contractual agreements with clients, vendors, and partners.
• Records of payroll and withholding taxes for businesses with employees.

Best way to reduce taxes for an LLC or Corporation

Reducing tax liability requires strategic planning and a thorough understanding of U.S. tax regulations. We highly recommend getting help from a professional or using our platform – Firstbase Tax Filing, to ethically reduce the money you pay the IRS. There are three major ways to reduce taxes for your LLC or corporation.

Claiming all allowable tax deductions

The first step to reduce taxes is to claim all allowable deductions. Allowable deductions are expenses incurred during the course of running a business that can be legally subtracted from your total taxable income. Here are some examples:

• Office supplies, software subscriptions, and other operational costs
• Marketing and advertising costs
• Legal, accounting, and consulting fees
• Business-related travel within the U.S. or internationally
• If you work from home abroad, part of your living expenses may qualify as a deduction if directly related to your U.S. business

When you claim these deductions, you don’t need to pay any tax on such purchases or expenses.

Reduce tax liability with credits

Tax credits help founders directly reduce tax liability. One notable example is the R&D tax credit, which rewards businesses for investing in innovation. Businesses can use the R&D tax credit to reduce the amount of federal tax owed. If your company spends money on things like creating and testing new products, improving existing product design, or conducting research, it can qualify for the R&D tax credit. 

How to avoid being audited by the IRS

The fear of an IRS audit can keep you up at night. Audits aren’t random, but certain practices can increase your chances of being flagged. By understanding and avoiding these mistakes, you can reduce the risk of being audited.

1. Don’t leave transactions uncategorized

Uncategorized transactions in your books might look inconsistent and confuse auditors, making the IRS suspicious. A common mistake founders make is misclassifying personal expenses as business deductions which leads to inflation of your deductible costs. The IRS scrutinizes businesses with unclear or overly broad expense claims.

To resolve this issue, use an accounting software like Firstbase, which helps you categorize transactions as soon as you connect all your business accounts with the platform.

2. Avoid amending returns

Amended tax returns are the forms you use to correct errors or update tax returns you have already filed with the IRS. It’s good to rectify your errors. However, if your amended tax return has significant changes from your original submission without sufficient justification, you might come under the IRS audit radar.

When an amended return is filed, it bypasses automated systems that typically handle standard returns. Instead, an IRS agent manually examines the return to ensure accuracy and compliance. This increases the chance of identifying discrepancies, errors, or omissions that might raise red flags.

The form you fill out to amend returns is 1040-X. Remember to report these three items when you do so:

• Your original return with changes documented in column A of the 1040-X form.
• The net change in column B and an explanation in Part III.
• The correct amount after the changes in column C.

3. Don’t use round numbers

When you use round numbers everywhere at the time of filing tax returns, the IRS might become suspicious. The IRS doesn’t mind if you round up to the nearest dollar, but rounding up by tens or hundreds of dollars just to make a tidy report will definitely trigger an audit. 

• Acceptable - $5.78 to $6
• Not acceptable - $660 to $700

4. Don’t overestimate charitable contributions

The IRS encourages individuals to donate food, clothes, and even used cars as charitable contributions by offering a deduction in return for a donation. But the question is – How much can you claim in charitable donations without getting audited? 

The answer is to just be honest and report the actual amount you donated. Keep all the details and documents of your donations with you as proof.

How to Deal with Double Taxation

Double taxation happens when your income is taxed in both the U.S. and your home country. But there are some strategies you can follow to get rid of the problem.

1. Tax treaties

Tax treaties are agreements between the U.S. and other countries designed to prevent double taxation on income earned across borders. These treaties define which country has the primary right to tax incomes like dividends, interests, royalties, or profits. For a founder abroad, it's important to know the tax treaty between the U.S. and their home country. To claim these treaty benefits, founders must fill out and submit form W-8BEN-E.

Remember that tax treaties can be complex, and misinterpretation can lead to penalties. It’s better to get the help of a tax advisor experienced in international taxation to deal with treaties.

2. Pay yourself a salary

Paying yourself a salary can help you reduce the effects of double taxation. That’s because when you pay yourself a salary, it’s considered a business expense, reducing the taxable income of your company. The process kills two birds with one stone:

• It lowers the amount of corporate tax owed.
• Because salaries are taxed as personal income, it avoids the additional layer of dividend taxation.

But remember to remain compliant. Ensure the salary you pay yourself is ‘reasonable’ for your role and the industry you work in. The IRS closely monitors and scrutinizes salaries that appear significantly low or high.

File Your Taxes with Firstbase

Firstbase Tax Filing lets non-U.S. based founders file taxes in minutes accurately. We even help you with local filings, too:

• IRS filing: Covers federal taxes like income, payroll, and business deductions; applies to all U.S. businesses.
• State filings: States vary in tax requirements and most require you to file if you operate in them.
• City filings: Some cities require additional filings for local taxes.

Firstbase has tax experts available to help you at every stage of your tax filing process. You can chat or book a call with these professionals at your convenience.

The pricing for Firstbase Tax Filing is clear and transparent. For C-corps and Multi-member LLCs, it costs $1,799 annually to get started. For Single-member LLCs owned by Non-U.S. residents, it costs $899 annually.

As a founder abroad, tax filing can get tricky. Sign up for Firstbase Tax Filing, and let us deal with your taxes for you.