How am I taxed as a non-US resident owning an LLC selling on AMZ?

My answer to How am I taxed as a non-US resident owning an LLC selling on AMZ?

Answer by Wray Rives:

As a general rule selling on Amazon is considered US sourced income and requires filing a US federal income tax return. In the case of one non-resident owning an LLC that is selling on Amazon, that means the owner files a form 1040NR with a Schedule C to report the income and expense of the business. If the LLC has more than one owner, then it will require filing a Form 1065 Partnership Return for the LLC and then each individual owner will file an individual non-resident US return.

You also have the option to elect to have the LLC taxed as a corporation, which in many cases will allow the individual owners to avoid filing a US return, but it means the LLC will file a separate US Corporate Tax Return, Form 1120. There are a number of pros and cons to this approach and I suggest you have a conversation with a US tax professional before making a corporate election to be sure you understand how that will impact your tax situation.

Depending on which state the LLC is registered in, you may also need to file a state income tax return and will most definitely need to file a state franchise tax return. In many cases the state franchise tax is coordinated with the state income tax or is simply an annual fee.

You will also probably have requirements to register and pay income tax, franchise tax and sales tax in several other states. FBA by Amazon creates an agency relationship with Amazon which gives the LLC nexus (Understanding nexus and sales taxes) in any other state where Amazon stores your inventory. That will require you to register the LLC with those impacted states and file tax returns with those states.

How am I taxed as a non-US resident owning an LLC selling on AMZ?

When flipping houses, does it make sense to set up a corporation?

My answer to When flipping houses, does it make sense to set up a corporation?

Answer by Wray Rives:

From a US tax perspective absolutely not. When you flip houses, you are generally creating taxable capital gains. Individuals can often pay a lower rate of tax on capital gains, but for a corporation capital gains are just another item of ordinary profit and are taxed as such. If you are flipping houses on a constant short term basis, this benefit is mitigated, but in my experience it is not uncommon for a house flipper to hold properties for more than the required 1 year to receive long term capital gain tax treatment.

If you are concerned about liability protection, I suggest you consider conducting your activity through an LLC and buy a really good insurance policy.

When flipping houses, does it make sense to set up a corporation?

What are my tax duties as a non-resident-alien and LLC owner?

My answer to What are my tax duties as a non-resident-alien and LLC owner?

Answer by Wray Rives:

First off I need to give you a disclaimer that taxation of non-residents by the US is a complex topic.  I am going to give you general answers, but you really should contact a US tax professional and discuss all the details and specifics of your unique situation.  I am also required to say that nothing I tell you can be used to avoid paying income tax to the US that you are legally obligated to pay.

Now:  Generally having a checking account in the US does not subject you to US income tax.  You have to look to the nature of the income producing activities.  If you are not selling tangible goods and only performing a service and you perform all of that service outside the US, meaning you have no physical presence in the US, you should not have what is known as Effectively Connected Income (ECI) and should not owe US income tax.  NOTE:  a very small change, such as making a business trip to the US can easily change that.

Owning an LLC in the US is likely going to put you one step closer to having ECI but does not in itself mean you now owe US income tax.  If you are the sole owner of the LLC and choose the default tax designation for an LLC which is disregarded entity, then the IRS ignores the existence of the LLC and you continue to look at your income producing activity the same way you did as an individual discussed above.

Again it takes very little to change these circumstances.  Adding an additional owner, even another non-resident alien, makes your LLC a partnership and thus subjects all partners to US income tax on profits from carrying on your business in the US. 

Finally you are absolutely correct that many people are not aware that in the internet age the US can actually be a great tax haven for US non-resident aliens because of how the US taxes non-resident non-citizens.  As long as the non US resident can avoid ECI, and choose carefully where they reside, they can greatly minimize their income tax while still providing services to the US market.

What are my tax duties as a non-resident-alien and LLC owner?

If I am using my earnings (W2 paycheck) to fund my own new separate legal business, what can I deduct (assume loss for tooling/prototypin…

My answer to If I am using my earnings (W2 paycheck) to fund my own new separate legal business, what can I deduct …

Answer by Wray Rives:

A2A, I concur with Mark Rigotti that if you are just at the tooling and prototyping stage in your business, you need to capitalize and amortize these initial cost to develop whatever it is you are going to sell. Once you actually are ready to start selling, then you can begin writing off these costs and deducting any normal and necessary business expenses to operate your separate business. If the expenses exceed your revenue, (which is common for a startup business) then those losses will generally offset your ordinary income from other sources and reduce your taxable income.

Note that you cannot continue operating at a loss indefinitely or you will be subject to rules that basically you must not be engaged in the business for the intent of making a profit. Is Your Hobby a For-Profit Endeavor?

If I am using my earnings (W2 paycheck) to fund my own new separate legal business, what can I deduct (assume loss for tooling/prototypin…

When is employer provided housing taxable to the employee? When can it be deducted fully by the employer?

My answer to When is employer provided housing taxable to the employee?  When can it be deducted fully by the emplo…

Answer by Wray Rives:

Generally the cost to provide employee housing is always a deduction for the business.  When it is taxable to the employee depends on several questions:
  1. Is the housing provided for the convenience or benefit of the business
  2. Is the housing on the business premises
  3. Is using the housing a condition of employment

If you can answer yes to all three, then the housing should not be taxable to the employee.

You may want to read the IRS guide regarding Fringe Benefits at Publication 15-B (2012), Employer's Tax Guide to Fringe Benefits

When is employer provided housing taxable to the employee?  When can it be deducted fully by the employer?

How much do self published eBook authors have to pay in taxes?

My answer to How much do self published eBook authors have to pay in taxes?

Answer by Wray Rives:

Since you say self published, I am going to assume you are receiving a percentage of the sales of your books and this is not a situation where you have sold the rights to your books and are receiving royalties.  Even if you do receive "royalties" on your published works, it is probably still self employment income to you as I can't think of circumstances where royalties for your original works would not be self employment income.  If you wrote one book and never intend to publish another or wrote the book for an employer then a royalty is a royalty, otherwise be careful that some may try to tell you that because royalties paid to a writer is called "royalties" it is reported on Schedule E and not on Schedule C, as this is just not the case.

Your income is considered self employment income.  You pay the same progressive income tax rate as any other taxpayer does, the only difference is on top of income tax, you also pay self employment tax equal to 15.3% of your net profits from writing and selling books.  This self employment tax is where you are getting the concept that you pay higher taxes than say someone with a W2 job.  The W2 employee is having Social Security and Medicare tax withtheld from a paycheck at the rate of 7.65% on the first $118,500 of gross pay.

The key term for you is net profits not gross pay, because you get to deduct reasonable and necessary business expenses incurred in your writing/publishing business

So for a writer/publisher, you should consider things like laptop that you use exclusively or at least primarily for writing and publishing.  Do you have a space in your home that you use exclusively for writing and publishing work, if so you might benefit from a home office deduction.  Other things like expenses to promote or research a book could all be a possible tax deduction.

The net profit after deducting expenses from your gross receipts is what your self employment tax is calculated on and is also the number that gets added to any other income to determine your income subject to income tax, using the same tax tables everyone else uses.

How much do self published eBook authors have to pay in taxes?

Why do I have to pay higher taxes for being self employed than I did when I was working for a corporation, even though I am earning the s…

My answer to Why do I have to pay higher taxes for being self employed than I did when I was working for a corporat…

Answer by Wray Rives:

The biggest difference tax wise between self employment and working as an employee is self-employment tax, income tax rates are the same for the same taxable income.

  When you are an employee you pay 7.65% FICA and Medicare tax and your employer pays a matching amount for a total 15.3% combined FICA/Medicare tax.

As a self-employed individual you are both employee and employer so you pay both parts of the FICA/Medicare tax for a total combined self employment tax rate of 15.3%.  The one break you get is that as an employee you pay tax based on your gross pay, but as a self employed individual you pay based on your net profit, so business expenses will reduce both your taxable income and your self employment tax, whereas it is pretty difficult for most employees to get a tax deduction for un-reimbursed expenses due to limits on itemized deductions.

Why do I have to pay higher taxes for being self employed than I did when I was working for a corporation, even though I am earning the s…

Do I have to file an 83b as a startup advisor?

Answer by Wray Rives:

There is no requirement that you ever file an 83(b) election, doing so is completely optional.  When you receive restricted assets, such as stock options with a vesting schedule, you are not required to report the receipt of that asset as income, until you have the full rights to sell that asset or otherwise convert it into cash.  The restricted stock is not income in your hands until whatever restrictions, commonly a vesting schedule, expire.  Upon expiration of the restrictions the stock becomes taxable income to you at whatever the fair market value is in the future when the restrictions expire.

What an 83(b) election does is accelerate the recognition of income to today rather than in the future when the restrictions expire and fix the current taxable income at the today's fair market value rather than the future fair market value.  When you sell the stock in the future, you pay capital gains tax on the appreciation in value from today until you sell the stock.

Obviously stock in a startup typically will have a low current fair market value and if the startup is successful the future fair market value could be significant.  Therefore making an 83(b) election means you pay capital gain tax rate rather than ordinary income tax rates on that increase in value.  The risk is not every startup succeeds and you are paying some current ordinary income tax today and if the stock value does not go up, you have a capital loss in the future rather than never having to recognize the income at all.

So while there is no requirement to file an 83(b), if you don't you will miss out on the opportunity to pay lower tax rates on any future appreciation in value of the stock.

Do I have to file an 83b as a startup advisor?

How do I process SaaS payments with the help of a US LLC/corporation?

Answer by Wray Rives:

SaaS or subscription services are generally consider digital goods for tax purposes and are subject to US income tax and depending on the state you register in state level income and sales tax also.
First forming a US corporation will require filing a US corporate tax return and paying US federal income tax on the net profits of the business.  Being a non-resident owner does offer some planning opportunity by selecting a state that has no state level income tax and minimal or no sales tax.  I would suggest that Wyoming may be a good choice for you.  You also have the ability with a corporation to pay a reasonable fee back to the non-resident owner and affiliated entities for services provided to the US entity.  I would caution you that any such transactions with foreign related parties are required to be disclosed on the corporation's tax return and are subject to rules on Transfer pricing of tangible goods between controlled businesses .
An LLC has many of the same tax considerations as a corporation regarding sales tax with the major difference being in the US federal tax level.  A single member LLC is by default a disregarded entity for US federal tax purposes which is just a fancy way of saying that for taxation the US looks to the LLC as simply an extension of the non-resident owner.  That will mean the non-resident owner has to file a US non-resident tax return to report profits from any US sourced income, which as already mentioned typically includes digital goods, with certain exceptions which may apply in your situation because you are in India.
The US and India have a tax treaty that says your business profits are only taxed in India, unless you conduct your business through a permanent establishment in the US.
Sorry this is a long but highly relevant definition from the treaty about what is a permanent establishment:
1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term “permanent establishment” includes especially:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources;
(g) a warehouse, in relation to a person providing storage facilities for others;
(h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on;
(i) a store or premises used as a sales outlet;
(j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve month period;
(k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve month period; (l) the furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve month period; or (ii) the services are performed within that State for a related enterprise (within the meaning of paragraph 1 of Article 9 (Associated Enterprises)).
3. The term “permanent establishment” shall be deemed not to include any one or more of the following:
(a) the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or occasional delivery;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;
(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise.
4. Where a person – other than an agent of an independent status to whom paragraph 5 applies – is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State if: (a) he has an habitually exercises in the first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in that State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise.
5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's-length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.
So, if you can avoid the above criteria and not conduct business through a permanent establishment in the US, then you will most likely want to choose to be a single member LLC for federal tax purposes and avoid US federal income tax.  You would still be subject to state franchise taxes and sales taxes which as I mentioned you can often plan around by choosing the right state in which to incorporate.  Also your income would still be taxable in India, if it is not taxable in the US.
Finally US non-resident taxation is a fairly complex and very fact based area of US tax law, so it is probably worth your having a conversation with a US tax professional to consider all the specific "facts" about your business to be sure you structure the operation to minimize your tax liability.  Simply changing one fact can often change the answer as to where you will be required to file and pay taxes.

How do I process SaaS payments with the help of a US LLC/corporation?

Why do I have to pay higher taxes for being self employed than I did when I was working for a corporation, even though I am earning the s…

Answer by Wray Rives:

The biggest difference tax wise between self employment and working as an employee is self-employment tax, income tax rates are the same for the same taxable income.

  When you are an employee you pay 7.65% FICA and Medicare tax and your employer pays a matching amount for a total 15.3% combined FICA/Medicare tax.

As a self-employed individual you are both employee and employer so you pay both parts of the FICA/Medicare tax for a total combined self employment tax rate of 15.3%.  The one break you get is that as an employee you pay tax based on your gross pay, but as a self employed individual you pay based on your net profit, so business expenses will reduce both your taxable income and your self employment tax, whereas it is pretty difficult for most employees to get a tax deduction for un-reimbursed expenses due to limits on itemized deductions.

Why do I have to pay higher taxes for being self employed than I did when I was working for a corporation, even though I am earning the s…