U.S. Accounting Tips for International Small Business Investors

Introduction

International investors looking to expand into the U.S. need a clear understanding of accounting and tax requirements. Today, we’ll discuss key considerations for international investors, particularly those looking to invest in small businesses, and the structures that make investment efficient and compliant.

H&Co, a top accounting firm based in South Florida, has specialized in assisting international investors for 25 years. They handle accounting, fiscal matters, and tax planning, making these often complex processes more accessible for those interested in the U.S. market.

At Visa Franchise and Vetted Biz, our primary mission is to help clients find and analyze suitable businesses, especially franchises that qualify for the E-2 investor visa. Over the past five years, we have successfully assisted more than 350 clients from over 50 countries in immigrating to the U.S. by helping them select the right business.

This article will outline key accounting topics presented by Alexandra Martinez, Director of Client Services at H&Co, focusing on tax structures, accounting basics, and the processes needed to comply with U.S. regulations.

Tax Structures

For international investors, understanding the different tax structures in the U.S. is critical. These structures dictate your tax obligations and affect your investment outcomes.

Non-Resident vs. U.S. Tax Person

Tax liability in the U.S. depends on whether you are considered a non-resident alien or a U.S. person for tax purposes. This distinction affects the scope and amount of taxes due.

Non-Resident Alien (NRA)

A non-resident alien is a foreign individual who spends a limited amount of time in the U.S. and is not considered a U.S. resident. Whether you are a non-resident depends on your visa and the duration of your physical presence in the U.S.

Taxable Income

As an international investor, you may be subject to U.S. taxes on income derived from activities such as:

• Services: If you are physically present and provide services in the U.S.
• Rental Income: Income earned from renting out property in the U.S.
• Capital Gains: Income generated from selling a property held for more than a year.

The U.S. also applies estate taxes to non-residents on U.S. assets, with a $60,000 exemption. Any value above this exemption is subject to estate tax.

Accounting Basics

Accounting is the foundation of every business, and the U.S. has specific accounting rules that investors must follow. The accounting formula is based on Income – Expenses = Profit. A key benefit of the U.S. tax system is its flexibility with business deductions.

Tax on Net Income

You are taxed on net income, not gross income. Deductions reduce the taxable amount, and proper management of expenses helps minimize tax liability. It is essential to use company credit cards solely for business expenses and avoid personal charges.

Ownership Structures

There are multiple ownership structures to consider, each with its own tax implications.

Individual Ownership

In individual ownership, the investor files an individual income tax return and pays tax on the net profit derived from U.S. operations. If the business is an LLC, it will file an informational return, but the individual is responsible for paying taxes, with rates ranging from 10% to 37%.

Capital Gains

If you hold an asset for more than 12 months, capital gains may be applied at a rate of 0% to 20%.

Hybrid Entity (LLC)

A Limited Liability Company (LLC) offers legal protection and liability separation. An LLC is a hybrid entity because it can elect how it is treated for tax purposes. By default, an LLC is a pass-through entity, meaning its profits are taxed at the individual level.

U.S. LLC with Multiple Members

With multiple members, an LLC is treated as a partnership. This structure has the following benefits:

• Reduced audit risk compared to individual ownership.
• Single-level taxation, avoiding dividend taxes.

U.S. Corporation

A U.S. corporation (Inc. or Corp.) pays corporate taxes at a flat rate of 21%, plus any applicable state taxes. In this structure, the owner does not file individual taxes, as the corporation itself pays taxes.

Dividend Tax

Withdrawals from a corporation are considered dividends and are subject to a 30% tax rate for non-resident aliens. Treaties with certain countries may reduce this rate.

Payroll Taxes

Foreign investors who open a U.S. business can hire staff, even if they do not have a work permit. Standard payroll taxes include:

• Medicare: 1.45% paid by the employer.
• Social Security: 6.2% paid by the employer, with a limit based on annual wages.
• Unemployment Contributions: Federal and state-specific rates.

Substantial Presence Test

To determine your U.S. tax residency, the substantial presence test is used. This test assesses the time spent in the U.S. over a three-year period to determine if you are subject to U.S. taxation.

Formula

The formula used considers:

• 100% of the days present in the current year.
• 1/3 of the days present in the first prior year.
• 1/6 of the days present in the second prior year.

If the total is 183 days or more, you are considered a U.S. tax resident. The threshold for maintaining non-resident alien status is spending fewer than 120 days in the U.S. each year.

Summary

H&Co is a boutique CPA firm specializing in international clients, offering services such as company setup, tax planning, accounting, and ongoing compliance. With over 25 years of experience, H&Co provides personalized service in multiple languages to assist with every aspect of the investment process.

For international investors, it is crucial to choose the right ownership structure and comply with tax obligations to maximize returns and minimize risks. Understanding the substantial presence test is also key to maintaining your preferred tax status.

Questions and Contact Information

If you have further questions or need personalized assistance with your investment strategy, reach out to Alexandra Martinez from H&Co. You can also visit Vetted Biz for more information on franchise opportunities.