Deciding to uproot your business and go virtual can be very liberating. More lifestyle options become available to you once you structure your business to be run from anywhere in the country—or the world. But it's not quite as easy as picking up and leaving; there are a number of things to consider and account for before buying that plane ticket. Here are some things to consider before pulling the plug on your office space.
To help sort through it all, I chatted with Marion Harrington, who has established a reputation as a "maverick tax guru" in the financial planning field as a result of authoring a detailed international tax research paper on International Private Pensions and her very laid-back style of doing business. She works with Location Independent clients and is developing a country-specific LIP Tax & Finance Guide to help people uproot their own businesses.
Benefits to Uprooting your Business
Lower Capital & Operational Costs. With no building premises to pay for and maintain, you see an instant savings. Other capital and operational expenses associated with having a physical office are also significantly reduced.
Increased Profits. There aren't really any additional costs to making your business virtual, so all the money you save in lowering your capital and operational expenses go directly into your pocket.
Fluid Employee Base. Depending on your employment needs, you may be able to outsource your needs to freelance or contract employees or virtual assistants. By engaging freelance employees only as required, you can also reduce your operational costs. Those key persons to your business can remain on the payroll, and work as telecommuters.
Work with Clients Internationally. Depending on your market and product or service, you could get clients/customers from anywhere in the world, since you are set up to assist them virtually. This can open up your business to international markets, and be very rewarding.
Psychological Freedom. Even if you don't physically move from your home town and roam the world at large, uprooting your business can give you a great sense of freedom in knowing that you have options.
Pitfalls to Uprooting Your Business
Fluctuating Currency Rates. If you decide to stay or live in another country, you could find that your personal income fluctuates even though it may not on paper. "If your main target market is in the U.S. you would logically bill out in Dollars. However, if you live in the EU and the Euro dramatically weakens, all of a sudden your monthly cash-flow forecasts [decrease]," says Harrington.
To make your accounting life easier around this issue, Harrington recommends keeping accurate and timely records. "Currency issues figure in IRS returns as well — all numbers have to be expressed in Dollars. Do your accountant favor — if you receive monies in any currency apart from Dollars, make a note of the exchange on the day you receive it."
International Tax Planning Considerations
Although you can structure your tax situation to minimize tax liabilities, it's very difficult (and usually illegal) to evade taxes entirely by playing the international tax dance. International tax planning is about how you organize your affairs to make the most sense for your business and cash flow, while minimizing taxes payable. Harrington says things like nationality, residency, and domicile become important. "You can have a different tax residency from your physical residency. Each country has its own definition of what residency means. Sometimes you can have a complete hybrid."
Claiming Worldwide Income. Harrington warns that even if you live outside of the U.S. and earn money from other countries, you still have to claim it on a U.S. Return if you are a U.S. Citizen. "Uncle Sam exercises his right to tax citizens on their worldwide income, wherever they live. Strictly speaking, even individuals who are born abroad but have a U.S. mother or father are supposed to file a return with the IRS."
Foreign Earned Income Allowance. If you run your business outside of the U.S., you could be eligible for a huge tax break called the Foreign Earned Income Allowance (FEIA). "Providing you meet certain criteria, you are permitted to exclude $91,400 in earned income each year from your taxes ($182,800 for a married couple). This isn't a credit or deferral but a complete exclusion from your taxable gross amount. The FEIA could possibly nullify all tax liability depending on the rest of your circumstances," says Harrington.
Travelling the World with Multiple Streams of Income. "Legislation on operating certain businesses in each country varies, virtual or otherwise," says Harrington. You have to pay attention to the nationality of your customers, the tax laws in the country in which you reside (or in some cases are just visiting if you continue to operate your business during your visit), as well as U.S. tax regulations. "In the majority of instances a suitably worded disclaimer prominently situated on your website is usually sufficient to satisfy most jurisdictions."
Visa Requirements. Although some countries allow people on tourist visas to operate virtual businesses, others don't. Be sure to research the visa regulations and requirements of any country you visit.
International Tax Regulations by Country. Don't assume that each country has similar tax laws. For example, in France, you could unwittingly assume tax residency depending on your length of stay and bank account structure.
Offshore Corporations. When I asked Harrington about the benefits of setting up an offshore corporation, I learned there is no clear-cut answer. "There are certain cases where an offshore corporation might result in a minimization of tax liability but detailing all the specifics would demand an eBook on that subject alone. I certainly wouldn't consider offshore unless I had already taken professional advice. So
much depends on the unique set of circumstances in each case."
U.S. Withholding Tax. Your cash flow could be affected by U.S. Withholding tax regulations, which are complicated and were recently adjusted (in January 2010). You can read IRS Publication 519 to determine how your occupation and target market is affected.
Checklist of Things to Do and Questions to Ask Before Uprooting Your Business
1. Get organized. Harrington cites getting your tax and financial house in order as a priority. "Organizing your tax and finances should rate as an absolute priority both before launch and before you hit the road."
2. Figure out where you're going. How you structure your business will depend on where you're going and how you'll generate your income.
3. Set financial goals and expectations. How you structure your business and international residency depends on how far you're prepared to go to save tax.
4. Educate yourself. "Familiarize yourself with key terminologies both domestic and international. If you're planning to travel, you need to carry out extensive research. Seek out country specific tax information and back-check with domestic law."
5. Consult an expert. Consult your accountant and financial planner to ensure you're on the right track. If you plan to travel, Harrington suggests consulting an international tax attorney or financial planner with international experience. Your team of experts can also help you stay on top of the ever-changing laws and legislations.
6. If you want to live somewhere else, decide if you'll return to the U.S. Whether or not you plan to return to the U.S. for residency purposes can have huge implications on your tax situation. Some tax and residency considerations include:
- Income expectations.
- Whether you are prepared to break all ties with the U.S.
- Changing your passport/nationality.
Lastly, take a look at Essential Services for the Road to help make your virtual business run smoothly from anywhere in the world, with nothing more than an internet connection.
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