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DanielleCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 793
Experience:  Years of Experience in Business & Personal Taxes
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I am American and have a wine trading company I opened in Hong

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I am American and have a wine trading company I opened in Hong Kong last yeaer to trade not only in China but to own labels(intellectual property) of my own brands I create and sell to the world. Mainly USA importers and Chinese importers. I also consult for several US based wine companies to help them open markets in CHina. I am not wealthy, so I operate currently on a tight budget and never seem to have over 10 thousand USD in my account which I understand is the threshold for reporting foreign account to US government.( I am aware of course, and referencing global taxation policy of US government.)
Am I correct in this assumption?
And also, my wife seems to think I might owe taxes in USA for having USA companies pay my HK company ( they wire the money overseas into my HK account), and I argue that is consulting based on foreign work and paid to a foreign company , not me personally. Therefore, my stance is I owe no taxes on this in the USA itself. Any help on this greatly appreciated.
Welcome and thanks for your question!

First, let's talk about your personal reporting requirements:
1) FBAR (Foreign Bank Account Reporting) requirements using form TDF 90-22.1 As you mention, the filing threshold is $10,000 at any point during the year. Note that if you have multiple accounts that the $10,000 is calculated based on the total in all your accounts and not a per account basis.

2) Form 8938 (Statement of Foreign Financial Assets) - the filing threshold for this is $50,000 in assets at the end of the tax year or $75,000 at any time throughout the year. Its definitions of foreign assets are more comprehensive than that of the TDF 90-22.1,so depending on the value of the stock of your Hong Kong company, you may need to complete this form. Here's a good summary of what's a reportable asset for Form 8938 and TDF-90.22.1. If required, this form is submitted as part of your 1040 tax return.

3) Income reporting on a US tax return - any income to you personally derived from the Hong Kong business must be reported on your personal tax return. Remember that you can take a credit on your 1040 for any Chinese (or other foreign) taxes you personally pay.

Second, you mentioned your wife is concerned about U.S. tax implications on the income. Amounts paid to a foreign corporation and not into your personal account are the corporation's income, not yours personally. You do not need to report this business income on your personal 1040.

Please let me know if you need clarification on any of the above points and I will gladly assist you. If not, then please give this answer a positive rating. Thank you and have a wonderful day.
Customer: replied 4 years ago.

Hi Danielle,

Thank you for your answer.

As to the FBAR filing, I am trying to not let my account hit 10k at anytime. It has only come to 7500 at one point but because I have so many business expenses in developing my labels, and other expenses, I can easily draw down before next influx of funds comes in.

And as to form 8938, I definitely do not have assets even close to this . At least I do not foresee this happening this year. Of course, both points 1 and 2 will be blown away once I sell my first whole container of wine to China, and then I guess at that juncture I will be subject to filing.

And to number 3), I do not yet take any personal income distribution at all. All disbursements are strictly for business expenses at this time.

And to my wife's concern, does it matter of some of the consulting work takes place in America( ie- I help a distributor sell my wine to restaurants or shops when working in the field with their sales reps, or conduct training seminars?). The payments from distributors would still only go to my HK company.

Finally, when I do have to report the FBAR, will the IRS ever want to see my records from my overseas accounts? Can they actually "audit" me over there? Or am I a little more secure from auditing than if I was only in the USA? No that I would try to do anything wrong, I just feel more secure having an overseas business for many reasons including protection of business assets from frivolous lawsuits and hopefully less burdensome scrutiny from tax audits, etc.

I apologize for the delay in getting back to you.

Whether any of the corporation's income is taxable in the U.S. is a very gray area. U.S. Tax Code specifically states "A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable...on its taxable income which is effectively connected with the conduct of a trade or business within the United States." What constitutes "effectively connected" and "within the United States" is not clear cut and depends on a multitude of factors. Income from U.S. sources does not necessarily create a sufficient connection with the U.S. for tax purposes. I recommend consulting with an expert in your area, as that is not a determination that we could easily make in this forum.

It is unlikely that the IRS would ever want to see records on your overseas accounts, but they could and that applies regardless of FBAR reporting. In instances where it believes there is fraud, the IRS has been known to subpoena details on foreign accounts. I know that's not the case here, and I do believe it's doubtful that your foreign accounts would become the target of the IRS. Filing the FBAR form is not going to raise any audit flags.

Please let me know if you need anything else.
DanielleCPA and 2 other Tax Specialists are ready to help you
Customer: replied 3 years ago.

HI again Danielle,

You were very helpful before so trying to stick with you again.

I still have my HK trading company. New question/ dilemma, is, my wife and I just bought an 8 acre property in a county outside San Antonio Texas. We are converting the farmhouse there to a restaurant. Would there be any tax reasons/advantages to let my HK company own the restaurant? We personally own the house. We were thinking of "leasing" the house to the restaurant company, however we form the entity.

I was thinking due to the litigious environment in the USA perhaps being owned by the HK company would limit the ability for frivolous lawsuits. Perhaps this alone may be a good reason. Although I think a local , or at least USA citizen, needs to hold the alcohol licenses. Perhaps my state will allow me both to own the restaurant from HK, and since I am a US citizen, to also hold the wine and beer licenses.

Any thoughts/suggestions?

Hi Scott -

Thanks for your request. Would you mind please reposting this as a separate question? I will gladly assist you with it.