Tax is getting a little complicated for expat American business owners.
An unintended result of President Donald Trump’s Tax Cuts and Jobs Act is a transition tax aimed at the profits of multinational companies.
This transition tax demands expats running small businesses abroad should pay a 15.5% tax on foreign earnings held in cash and cash equivalents and 8% on other earnings.
The idea is to ‘repatriate’ profits massive companies like Apple, Google and Amazon are holding offshore, but lawmakers forgot to include a clause excluding small businesses.
The transition tax is applied to all earnings and profits between 1986 and 2017.
Respite for small businesses
The US Internal Revenue Service is offering some respite to small business owners by allowing them to pay the tax in several instalments – if they register and pay the first slice by September.
But business accountants say this is almost impossible as they will not know how much tax they owe because they will not have worked out repatriated dividends, which are exempt from the tax.
For small businesses, the transition tax is expected to lead to cash flow problems.
If a business has set aside cash in the bank to pay suppliers and next year’s tax, they are going to find themselves short because the transition tax will already have grabbed a slice of the money.
“If you knew you needed to keep $100,000 on hand for working capital, it wasn’t taxed by the US before, but now the US government is taxing that $100,000 at 15.5%, so you either fall short or need to set aside more cash and pay the tax on that as well,” said accountant Richard Tannenbaum.
“It’s going to be a push in September to understand this and get the calculations in place.
“Getting clients to understand the law is the first battle, getting them to believe you is the second battle.”
“Many European countries have high tax rates, and their idea is that they’ve been paying 35 percent taxes all along, why pay another US tax on top of that?”
Then there’s the problem of Accidental Americans who are US taxpayers because of a distant family link who do not believe the IRS has any jurisdiction over them because they have never set foot in the States.