Small Business Brief

Financial Services

Business Tax Responsibilities of Foreign Banking: When to Declare Earnings

It was estimated in 2017 that around $2.6 trillion is held by American businesses in foreign bank accounts.

The reasons for keeping assets in a foreign account are numerous, but the most obvious is the avoidance of America’s 35% tax on profits earned overseas. Holding cash in another jurisdiction sidesteps this expense, but it is crucial for a business to know when and how they must report their foreign holdings to American tax authorities.

Read on as we explore the tax ramifications around foreign banking, and when to declare earnings.

Setting up a Foreign Bank Account

Before considering the tax implications of foreign earnings, it might be useful to first look at the process of setting up a foreign bank account as an American.

This is important because of the difficulties many Americans face in this regard. Recent regulatory developments have made it challenging to set up bank accounts for some businesses in some jurisdictions. 

Because of more stringent requirements that have been set out by the IRS, many foreign countries are now unwilling to provide banking services to American business clients. The strict regulations and compliance standards involved mean that dealings with Americans simply are not viable for many institutions.

If you want to set up a foreign account, you should make every effort to address any credit concerns. This will make your business a more attractive prospect to foreign banking providers, who may not be willing to deal with you otherwise.

Foreign Banking: What Do I Declare to the IRS?

Your reporting requirements will vary widely depending on the nature and extent of your business.

However, the bottom line is that any US citizen who holds a combined total of more than $10,000 in overseas bank accounts must report these holdings. Reports must be filed with both the IRS and the Treasury Department.

These reports take the form of income tax returns as well as FinCEN Form 114. The latter is due for filing in April of each year, and applies to individuals as well as businesses.

It is worth noting that the federal government may instigate charges of both a civil and criminal nature against those who do not comply with foreign banking reporting requirements.

Staying on the Right Side of the Law

As you can see, tax reporting can be a tricky business when there are foreign bank accounts involved.

However, if you think that your business would benefit financially from foreign banking, don’t let the rules and regulations put you off. Specialist service providers like Abajian Law can help you to navigate the difficulties of managing money in a foreign country. Their counsel will ensure that you can maximize your profits while staying compliant with the various requirements set out by authorities here.

If your overseas business is flourishing, make sure to protect it as carefully as possible by staying up to date on best practices in the area of foreign banking.