TAX

Substantial Presence Test

Many successful entrepreneurs who own businesses in the United States come from other countries. If you are not a U.S. citizen but you own or operate a business in the U.S. you may be subject to different tax rules. One of the first things you'll need to do to determine what rules you may be subject to and what forms you need to file is to determine your residency status. The IRS has developed the 'substantial presence test' to help you to exactly this. The substantial presence test is applicable to sole proprietors and employees alike and should be your starting point as an international taxpayer. If you pass the substantial presence test, you will be considered a U.S. resident for tax purposes and your worldwide income would be subject to taxation in the United States.

UBER DRIVER / RIDESHARE

Ricky is citizen of the United Kingdom who has family members living in the United States. Last year, Ricky spent 12 days in the U.S. visiting his family. This year, Ricky came to the states for 180 days. During his six-month stay he made $6,000 periodically driving for Uber using his brother's car in order to earn some extra spending money for his trip (the terms of his visa allow him to work). Since Ricky does not have a green card and he was in the U.S. for a total of 184 days (180 from the current year + 4 (1/3 of 12) from the prior year), he would pass the substantial presence test and be taxed as a resident alien.

PROFESSIONAL SERVICES

Yan is a freelance lawyer based out of China who specializes in international mergers and acquisitions. Yan spent 60, 90, and 40 days doing business in the U.S. during 2016, 2017 and 2018 (current year), respectively. Since Yan doesn't have a green card, to determine her 2018 tax status she would complete the substantial presence test and count all 40 days from 2018 (100% of days), 30 days from 2017 (1/3 x 90) and 10 days from 2016 (1/6 x 60). Since Yan's substantial presence days only total 80, she would be taxed as a non-resident alien.

COURIER

Hans is a German citizen who lives in the United States and studies at Georgetown University. Hans was in the United states for 270 days last year attending school. To supplement his scholarship income, last year while he was in school he also drove for Post Mates in the evenings (the terms of his visa allow him to work), earning $7,000. Hans's status as a student qualifies him as an exempt individual, so he would be considered a non-resident alien for tax purposes despite passing the substantial presence test. When Hans files his taxes, he would prepare a Form 1040 NR (nonresident return), Form 8843 (statement for exempt individuals) and a Schedule C (business activity).

ENTREPRENEUR

Nina is a Chilean citizen who recently formed a California C-Corp for her new tech business. Since her business was still new, last year Nina didn't pay herself any salary or dividends. Nina did however spend 130 days in the U.S. meeting with potential investors (prior to the current year, she had not spent any time in the United States). Nina's accountant informed her that she would not need to file an individual tax return since she had no U.S. income during the year and given the number of days she had spent in the U.S. over the past three years she did not pass the substantial presence test. He did however advise that her C-Corp would need to complete a tax return and that there may be some additional schedules to complete since her business is foreign owned.

LANDLORD / AIRBNB HOST

Last year, Mihnea, a Czech citizen, spent 150 days in the United States on business (prior to the current year, he had not spent any time in the United States). While Mihnea was in the U.S., he hosted the second bedroom of his rental home on Airbnb, earning $6,000 of rental income. Even though Mihnea wasn't in the U.S. long enough to pass the substantial presence test he would still be required to file a U.S. tax return (Form 1040-NR) and attach a Schedule E to his non-resident return, reporting income from his rental activities.

MORE ON THE FOREIGN EARNED INCOME CREDIT

  • If you are not a U.S. citizen or do not have a green card, the substantial presence test can help you determine if you should file your taxes as a resident or a nonresident alien. You pass the substantial presence test and would be considered a U.S. resident for tax purposes if 1) you were in the U.S. for more than 31 days during the current year, and 2) 183 days or more during the the current year and the two years immediately before, counting all the days you were physically in the U.S. during the current year, 1/3 of the days you were in the U.S. in the year prior to the current year, and 1/6 of the days you were in the U.S. in the second year before the current year.
  • You should not count the following types of days as part of the test: Days you commute to the U.S. from Canada or Mexico (assuming you do so regularly), days you are an exempt individual (#4 below), days you left the U.S. due to a medical condition that developed while in the states, days you are in the U.S. for less that 24 hours when traveling between two countries (i.e. layovers less than 24 hours).
  • If you passed the substantial presence test and would be considered a U.S. resident alien for tax purposes, check the 'Closer Connection to a Foreign Country' (link below) rules to be sure your resident alien tax status still applies. Further, if you could be considered a resident alien for part of the year, and a nonresident alien for another part of the year, or if you have a spouse with a different residency status than you refer to IRS guidance to determine how you should file.
  • You can exclude days in the U.S. you would have been considered an exempt individual, which includes a foreign government related individual, professional athlete, a teacher / trainee (J or Q visa) or a student (F, J, M or Q visa).
  • The substantial presence test will help guide you to determine what individual returns you should file. Keep in mind though that if you own a business that is a separate legal entity from yourself, such as a partnership, corporation, etc. you may still have to file tax returns for your business regardless of your residency status. Additionally, if you are filing business returns, there may be additional filing requirements for international owners.
  • If you are not a U.S. citizen, will be filing a tax return in the U.S. and do not have a social security number, consider applying for an Individual Taxpayer Identification Number (ITIN) by completing Form W-7 along with your taxes.

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