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Lev
Lev, Tax Advisor
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Experience:  Taxes, Immigration, Labor Relations
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Im thinking about setting up a LLC or S-Corp (depending partially

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I'm thinking about setting up a LLC or S-Corp (depending partially on answers I get and which is best) in Deleware and operate from Japan although I'm a US citizen. I understand I'd need to pay the $250 Deleware franchise tax, what other taxes would I need to pay. I guess I'd need to pay tax to Japan? I'm just temporarily in Japan and live in Tennessee, so if it's a big advantage I can operate from Tennessee, in that case what taxes to Tennessee if operating out of Tennessee would for example a Deleware S-Corp have to pay?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

Hi and welcome to Just Answer!

If your business is profitable - using S-corporation as a business structure might provide you some saving.

 

A single member LLC is disregarded entity - for federal tax purposes all income and expenses are reported on the owner's individual tax return - schedule C - as for solo proprietorship.

The LLC wit several members is generally treated as a partnership - while a partnership is filing a tax returns - all taxable income is passed through to members and also taxes on individual tax returns.

In both situations - the income is a subject of self-employment taxes.

 

In case of S-corporation - shareholders are employees and receive wages - the IRS required that reasonable wages are paid.

The remaining income is distributed as dividends - without self-employment of FICA taxes - that is a main advantage of having S-corporation.

 

However - you might expect additional overhead for filing S-corporation tax return and employment tax returns - so your business income should be more than additional overhead to enjoy the tax saving.

In most situation - if you net income is $40,000 or more - S-corporation is preferable.

 

For tax purposes, people living in Japan are classified into following categories:

-- Non-Resident - is a person who has lived in Japan for less than one year and does not have his primary base of living in Japan. Non-residents pay taxes only on income from sources in Japan, but not on income from abroad.
-- Non-Permanent Resident - is a person who has lived in Japan for less than five years, but has no intention of living in Japan permanently. Non-permanent residents pay taxes on all income except on income from abroad that does not get sent to Japan.
-- Permanent Resident - is a person who has either lived in Japan for at least five years or has the intention of staying in Japan permanently. Permanent residents pay taxes on all income from Japan and abroad.

Note that there is a tax treaty between Japan and the USA which take precedence over the tax law. Here is the tax treaty document - www.irs.gov/pub/irs-trty/japan.pdf

 

You might qualify for the foreign earned income exclusion - because you worked and resided outside the United States for at least 330 days during the year - thus you may exclude up to $91,500 (2010 in foreign wages -- plus housing allowances

To receive that exclusion - the taxpayer should file either form 2555 or 2555EZ.

Please be aware that - the exclusion above will not affect self-employment taxes - only income taxes. Only earned income is excludable - income from wages and self-employment. For instance - dividends, investment income, rental income, pensions, etc - are not excludable.

Please also be aware that this credit is not granted automatically - you need to file a tax return and claim the credit.

 

In additional - if the same income is taxable in Japan and in US - you may claim a credit for taxes paid - so the same income would not be taxed twice. Use the form 1116.

 

Let me know if you need any help.

Customer: replied 2 years ago.
Thanks for the information. I'm still unsure about some things. The income exclusion you mentioned up to $91,500, does that mean up to $91,500 tax fees can be excluded? If for example I made $100,000 a year, I'm of course assuming taxes wouldn't go over $91,500, so in other words I'd end up paying no income tax under that exclusion? Also is this an exclusion that the Japanese government provides on money earned in Japan according to their deal with the US? So if I'm a US citizen but am in Japan for example then I might quality for that exclusion? For general information are you aware how much taxes are in Japan or any process I'd need to go through to register my foreign company here, or do I just need to showup and pay the taxes when they're due?
Expert:  Lev replied 2 years ago.

The income exclusion you mentioned up to $91,500, does that mean up to $91,500 tax fees can be excluded?

Foreign earned income exclusion is fro US federal taxes. If is simply exclude part of the income. The tax liability is calculated based on the remaining taxable income.

That is not the same as a tax credit which is deducted from the tax liability.

if for example I made $100,000 a year, I'm of course assuming taxes wouldn't go over $91,500, so in other words I'd end up paying no income tax under that exclusion?

The amount of foreign income exclusion is 2012: $95,100 ; 2011: $92,900
If you have an earned income $100,000 in 2011 and qualify for the full exclusion - your taxable income is $100,000 - $92,900 = $7,100 - your tax liability will be determined based on that amount.

Also is this an exclusion that the Japanese government provides on money earned in Japan according to their deal with the US?

That is a foreign earned income exclusion under the US tax law. It is not related to the US-Japan tax treaty.

So if I'm a US citizen but am in Japan for example then I might quality for that exclusion?

For the person to qualify for the foreign earned income exclusion - he/she should:
-- Work and reside outside the United States for at least 330 days during the year(Physical Presence test), or
-- Meet the Bona Fide test.

For general information are you aware how much taxes are in Japan or any process I'd need to go through to register my foreign company here, or do I just need to show-up and pay the taxes when they're due?
The following table shows Japan individual income tax rates for 2011:

Tax Base (Yen)Tax
1 - 1,950,000 5%
1,950,001-3,300,000 10%
3,300,001 - 6,950,00020% of base exceeding 3,300,000
6,950,001-9,000,00023% of base exceeding 6,950,000
9,000,001 - 18,000,00033% of base exceeding 9,000,000
18,000,001 and over40% of base exceeding 18,000,000

See additional information on this page - http://www.worldwide-tax.com/japan/japan_tax.asp

The deadline for filing a tax return in Japan for self-employed persona is March 15 of following year.

Here you will find official documents (some are available in English) - http://www.nta.go.jp/

Customer: replied 2 years ago.
Thanks so much for all the information so far, I've almost understood everything now. Please let me just clarify last few things. I understand what you mean regarding the tax exclusion now, but you said it's for US tax and filed in the US. My question is for Deleware LLC/S-Corp I've heard there are no taxes that need to be paid except the franchise tax of $250 if operating outside of Deleware. In that case I'm operating in Japan so that tax exclusion wouldn't benefit me at all correct? I'd only be needing to pay taxes to the Japanese government since I'm working in Japan, and then pay the Deleware $250 franchise tax correct? And in this case that tax exclusion wouldn't effect my tax here in Japan so I'd have to pay the full tax, I'm guessing if I make under 1,950,000 yen like you said 5%?
Expert:  Lev replied 2 years ago.
My question is for Delaware LLC/S-Corp I've heard there are no taxes that need to be paid except the franchise tax of $250 if operating outside of Delaware. In that case I'm operating in Japan so that tax exclusion wouldn't benefit me at all correct?
That is correct regarding Delaware state income taxes - if you do not have any business activities within the state of Delaware - no state income taxes.
However that doesn't affect your federal income tax liability - as an US citizen you are responsible for taxes on all your worldwide income regardless where you live.

I'd only be needing to pay taxes to the Japanese government since I'm working in Japan, and then pay the Delaware $250 franchise tax correct?
Your US tax liability are separated from your tax liability in Japan. As an US citizen you are responsible for taxes on all your worldwide income regardless where you live.
You need to file your tax return and calculate your tax liability.

And in this case that tax exclusion wouldn't effect my tax here in Japan so I'd have to pay the full tax, I'm guessing if I make under 1,950,000 yen like you said 5%?
Your tax liability in Japan and in the US - are separate issues. Your income is taxable in Japan because you earn that income in Japan. You have to file your US tax return because you are an US citizen. If you qualify for exclusion - your tax liability will be reduced or might be eliminated - but you still has to file your US tax return and report all your worldwide income.
Customer: replied 2 years ago.
Okay thanks for the information. So according to your information, I'm guessing it'd be an advantage to me if I operated in the USA compared to Japan, correct? If I were to operate from Tennessee then I'd pay Deleware franchise tax, then the Tennessee income tax. If I were to operate in Japan I need to pay Deleware franchise tax, report my federal tax in US for worldwide earnings and pay tax on that, then also pay Japan tax, correct? In the case I work from Japan like this, would I be charged regular income tax from the US on the income I earn in Japan? To put it simply I'm worried about getting charged tax twice, once from the US and one from Japan, in which case I should ratherly operate from a US state. By the way if you didn't notice I do business online mostly so it's easy for me to move where I operate, nothing physical to move really. That's why if it's to my advantage I can work from Tennessee instead. I think this is the last confusion I have. Thanks for all your help, please let me know.
Expert:  Lev replied 2 years ago.
So according to your information, I'm guessing it'd be an advantage to me if I operated in the USA compared to Japan, correct?
You operate your business from the location you are physically located. If you are in Japan - you operate your business from japan. If you are in US - you operate your business from the US.
If I were to operate from Tennessee then I'd pay Delaware franchise tax, then the Tennessee income tax.
The Tennessee income tax does not apply to salaries and wages and self-employment income - so - you will not pay Tennessee income tax.
If I were to operate in Japan I need to pay Delaware franchise tax, report my federal tax in US for worldwide earnings and pay tax on that, then also pay Japan tax, correct?
That is correct - however if the same income will be taxed in the US and in Japan - according to US-Japan tax treaty you will claim a credit for taxes paid to another country - thus effectively will avoid double taxation.
In the case I work from Japan like this, would I be charged regular income tax from the US on the income I earn in Japan?
That is correct.
To put it simply I'm worried about getting charged tax twice, once from the US and one from Japan, in which case I should rather operate from a US state.
There is no double taxation according to US tax treaty.
By the way if you didn't notice I do business online mostly so it's easy for me to move where I operate, nothing physical to move really.
You operate your business from your physical location - the same is true for online businesses. The place where you are physically located is the place from where you are operating your business.

Please be sure to accept the answer. Experts are credited only if answers are accepted.
Customer: replied 2 years ago.
Okay, sounds good. Thanks for the help. Regarding physical location, if it's a big advantage for me to be working from Tennessee what I'm saying is I can physically move and operate from there from next year.

>The Tennessee income tax does not apply to salaries and wages and self-employment income - so - you will not pay Tennessee income tax.

Okay so if I physically operated from Tennessee I'd still need to pay the federal income tax for being a US citizen correct? Can I just ask the percentage of that and if it depends on what state I am in for percentage? Then I can compare that and Japan. Thanks for all your help.

Riley
Expert:  Lev replied 2 years ago.
so - you will not pay Tennessee income tax.
The Tennessee income tax applies to most income from stocks, bonds and notes receivable at a flat rate of 6 percent. The first $1,250 in taxable income is exempt.
Okay so if I physically operated from Tennessee I'd still need to pay the federal income tax for being a US citizen correct?
As an US citizen - you are responsible for all your worldwide income regardless where you live.
Can I just ask the percentage of that and if it depends on what state I am in for percentage?
Your self-employment taxes are based on your net business income (after all deductions) - 15.3% (reduced rate in 2011 and 2012 - 13.3%)
Your income taxes are based on your total income, filing status, deductions, etc - see tax rate schedule on last page in this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf
Customer: replied 2 years ago.
I hate to have to confirm something else. For Japan, you've given me the individual income tax rate and not rate for corporations. If I register a S-Corp by myself no employees etc in Deleware, am I considered a self employed individual and be charged that way? I'm guessing yes this is the case, but I really want to make sure as there's a huge difference in the amount of tax paid by individual and company here in Japan as you probably know.

Update: To make my question simpler, I need to know if Japan sees an S-Corp with only me (1 person) as a self employed individual, or as a corporation (which one I would be taxed as). The chart you sent me of Japan taxes before is for self employed individual so I'm guessing that will be your answer, but there's a huge difference in the amount of tax that is charged so this is important to me.
Expert:  Lev replied 2 years ago.

For Japan, you've given me the individual income tax rate and not rate for corporations.

Please see for reference - http://www.worldwide-tax.com/japan/japan_tax.asp

  • In 2011 Japan national corporate tax is 30%.
  • Corporate tax on income of SMEs below 8 million yen is 18% on condition that the total equity is less than 100 million yen.
  • In addition to corporate tax (a national tax) there are two classes of local tax paid by the corporation:
    1) Inhabitant Tax.
    2) Enterprise Tax.
    These two classes of local tax significantly increase the rate of Japan corporate tax, so that it may, in actual fact, reach 41%. 42% in Tokyo.
  •  

    If I register a S-Corp by myself no employees etc in Delaware, am I considered a self employed individual and be charged that way?

    You will not be self-employed - but will be an employee of S-corporation. S-corporation pays you wages as if you work at a regular work.

     

    To make my question simpler, I need to know if Japan sees an S-Corp with only me (1 person) as a self employed individual, or as a corporation (which one I would be taxed as).

    S-corporation will be treated in Japan as a corporation - a separate legal and taxing entity - not as a self-employed individual.

    Lev, Tax Advisor
    Category: Tax
    Satisfied Customers: 22635
    Experience: Taxes, Immigration, Labor Relations
    Lev and 6 other Tax Specialists are ready to help you
    Customer: replied 2 years ago.
    Thanks for all the help, I've accepted your answer. Just one last clarification. You said S-Corp is treated as a corporation in Japan. How about Deleware LLC? That will be treated as self employed and not corporation correct? I will only pay self employment income tax in Japan correct? Please confirm for me.
    Expert:  Lev replied 2 years ago.

    A single member LLC is disregarded entity - it is not a separate entity for tax purposes - all income and expenses are passed to the owner and are reported on owner's individual tax return.

    The owner is treated as self-employed (or solo proprietorship).
    Enterprise Tax (so-called prefectural tax) are due by self-employed individuals in Japan based on net business income.

    Enterprise Tax includes two parts income tax and self-employment tax - so - you will pay both.
    See for reference

    http://www.tamagoya.ne.jp/tax/tax011.htm
    http://www.income-tax.jp/kakutei/jigyou/jiei.html

     

    As a self-employed person - you must file a tax return at the local tax office (zeimusho) for 2011 between February 16 and March 15, 2012.

    Appreciate for accepting the answer.

    Customer: replied 2 years ago.
    Okay. So if LLC, let me confirm please -

    http://www.japan-guide.com/e/e2206.html

    From here would be the "national income tax" and "Prefectural Enterprise Tax" correct? Please see the graph at bottom. So about 8~10% total if less than 1.95 million yen a year net business income? I just want an idea please, if I made $50,000 as an LLC for example how much would need to be paid for taxes to Japan?
    Expert:  Lev replied 2 years ago.

    Prefectural Enterprise Tax is an equivalent of FICA or self-employment taxes in the US - the purposes of that tax to fund social security system.
    The income tax - are in additional to that - and will go to the general revenue fund.
    When you file your tax return - both taxes are calculated - but in different basis.

    Prefectural Enterprise Tax is based on net business income;

    and income taxes are based on taxable income = net business income - plus other taxable income - minus a basic exemption and all other allowable deductions.

    Customer: replied 2 years ago.
    Thanks, but I just wanted to know the % for Prefectural Enterprise Tax in Japan for self employed person. Is that site correct? It says 3~5% on that site. So what I'm asking is if all I have to worry about is 5% income tax and 3~5% Prefectural Enterprise Tax if I operate from Japan, about 10% total? (if make for example $50,000 in a year)
    Expert:  Lev replied 2 years ago.
    You may not combine Prefectural Enterprise Tax and income tax because they are applied to different tax basis (applied to different amounts).
    But as a very raw estimate - you are correct.

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