[Papi Rico]

(02-11-2015 01:34 AM)Richiavelli Wrote:  

(02-06-2015 12:19 AM)Papi Rico Wrote:  

Expat tax question:

In 2014, John Doe successfully transitioned his online business from a Sole Proprietorship [BETA & ASSOCIATES] to an overseas-incorporated limited company [PAPI RICO LTD]. As of June 15, 2014 John began doing business under his new company name: he filed all necessary incorporation documents through his legal counsel, and overseas incorporation specialist. On that same date, John informed all of his preexisting clients of all changes, including his new company's name, physical address, webpage, and email. All invoices sent after June 15 reflected this information. PAPI RICO LTD was officially incorporated in the overseas jurisdiction on July 1, 2014.

Project 1 was ordered on June 15. Services were performed between June 16-20. An invoice was sent on July 1, and payment was collected on July 2, 2015.

Project 2 was ordered on June 29. Services were performed between June 29 and July 5. An invoice was sent on July 6 and payment was collected on July 7, 2015.

Project 3 was ordered on June 30. Services were performed between July 1 and July 15. An invoice was sent on July 15 and payment was promptly collected.

All services were performed overseas. All payments were received in the United States. John is unquestionably eligible for the Foreign Earned Income Exclusion: he spent a total of 14 days in the United States in 2014 and is the sole director and shareholder of the overseas entity.

Which of the 3 projects (if any) may John lawfully claim as income of PAPI RICO LTD, hence income subject to the Foreign Earned Income Exclusion?

Your advice on this matter is highly appreciated.

A bit vague, I need to know a little bit more information:

1. How were you picking up income of the sole properitorship in prior years?

2. Is the LTD treated as a flow through vehicle or is it a corporation?

3. The corporation is doing business with US citizens?

4. Are you sure you qualify for the Foreign Earned Income Exclusion? http://www.irs.gov/Individuals/Internati...quirements

The conservative part of me says that you wouldn't pick up any of the income inside of the LTD until incorporation, especially if there is documentation of such. I do not really see how that would affect your tax position though - if the LTD is flow through, you would still treat it as a sole proprietorship, only new there is a liability shield. I feel like I am missing something.

1. As a sole proprietorship, things were straightforward: I used cash-based accounting and paid self-employment tax on my worldwide income.

2. The LTD is a foreign corporation for US tax purposes. I understand there are Form 5471 filing requirements.

3. The corporation has US clients. However, it has no U.S. permanent establishment or office and performs all services overseas. To my understanding, this doesn't trigger 26 U.S. Code § 882 (a)(2)'s tax basis: gross income which is effectively connected with the conduct of a trade or business within the United States.

4. There is no question that I qualify for the Foreign Earned Income Exclusion.

The original question is this:

If I'm on a cash-based accounting system as a sole proprietor and bill clients as such, could my "successor" corporation pick up any payments received following the date of incorporation? I've been looking all over for legal authority, but cannot find an answer one way or the other..