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The consulting contract arrives from your first international client. You're a U.S. citizen operating a marketing consultancy from your Barcelona apartment. Annual revenue: €95,000. Expenses: €22,000. Net profit: €73,000 (approximately $79,000). You're thrilled—your business is profitable. You file a simple Schedule C reporting self-employment income, claim the Foreign Earned Income Exclusion to reduce U.S. taxes to near zero, and assume you're done. But then The IRS notice arrives fourteen months later. You failed to report your foreign business on Form 8858.
As an Expat business owner you must know how to file foreign business income and determine which IRS forms your foreign business structure requires beyond just Schedule C or Schedule E. You must be aware whether your business qualifies as a Controlled Foreign Corporation triggering complex anti-deferral rules, how the Foreign Earned Income Exclusion and Foreign Tax Credit apply to business income, and whether you owe self-employment tax even when business income is excluded from income tax.
In this article you'll learn exactly which tax forms your foreign business structure requires (sole proprietorship, partnership, corporation, LLC), how to report foreign business income and claim available exclusions and credits, when Form 5471, Form 8865, Form 8858, and other international forms are required.
How does U.S. tax treatment of foreign business structures work?
The U.S. taxes foreign business entities based on how they're classified under U.S. tax rules—not based on their foreign legal structure.?
Foreign corporation: A foreign entity organized under a law that describes or refers to the entity as a corporation, body corporate, or body politic. Most foreign limited companies, public limited companies (PLCs), società per azioni (SpA), and similar structures are foreign corporations.?
Foreign partnership: An entity with two or more owners that isn't classified as a corporation. Foreign partnerships include general partnerships, limited partnerships, and many foreign LLCs with multiple owners.?
Disregarded entity: A single-owner foreign entity that isn't classified as a corporation. The entity is ignored for U.S. tax purposes, and income/expenses are reported directly on the owner's tax return as if the entity didn't exist.?
Check-the-box election
Certain foreign entities can elect their U.S. tax classification using Form 8832 (Entity Classification Election). For example, a foreign corporation could elect to be treated as a disregarded entity or partnership for U.S. tax purposes (though this has significant consequences).?
Most expats don't make check-the-box elections because changing classifications creates complexity. The default classification usually applies.
Sole proprietorships and self-employment income abroad
If you operate as an individual freelancer or sole proprietor abroad (no formal foreign entity), you report business income on Schedule C just like U.S.-based sole proprietors.?
Schedule C reporting
Report all foreign self-employment income and expenses on Schedule C (Profit or Loss from Business). This includes freelancing, consulting, independent contracting, and any business activities conducted as an individual.?
Convert all foreign currency amounts to U.S. dollars using consistent exchange rates (transaction date or average annual rates).
Example: You're a freelance web developer living in Portugal. You earn €68,000 from clients worldwide, with business expenses of €12,000. Net profit: €56,000 (approximately $60,500 at 1.08 exchange rate). Report $73,500 income and $13,000 expenses on Schedule C, showing $60,500 net profit.
Foreign Earned Income Exclusion applies to Schedule C income
Self-employment income from services performed abroad qualifies as foreign earned income eligible for the Foreign Earned Income Exclusion (FEIE).?
For 2025, the FEIE allows you to exclude up to $130,000 of foreign earned income if you meet either the Physical Presence Test (330 full days outside the U.S. in any 12-month period) or Bona Fide Residence Test (bona fide resident of a foreign country for a full tax year).?
Example: Your Schedule C shows $60,500 net profit. You meet the Physical Presence Test. You file Form 2555 and exclude the full $60,500 from U.S. income tax.?
Self-employment tax still applies
Here's the critical point many expats miss: The Foreign Earned Income Exclusion excludes income from income tax but NOT from self-employment tax.?
Self-employment tax is 15.3% (12.4% Social Security + 2.9% Medicare) on net self-employment income up to $176,100 for 2025 (wage base limit for Social Security portion).?
Example: Your $60,500 Schedule C net profit is excluded from income tax using FEIE. But you still owe $60,500 × 15.3% = $9,257 in self-employment tax.?
This surprises many expats who think FEIE eliminates all U.S. taxes. It eliminates income tax but not self-employment tax.
Totalization agreements may eliminate self-employment tax
If you live in a country with a U.S. Totalization Agreement and are covered under that country's social security system, you may be exempt from U.S. self-employment tax. You must obtain a Certificate of Coverage from the foreign country's social security agency proving coverage.
Countries with totalization agreements include most of Europe (Germany, France, UK, Spain, Italy, etc.), Canada, Australia, Japan, and South Korea—30 countries total.?
Schedule SE for self-employment tax
Complete Schedule SE (Self-Employment Tax) to calculate your self-employment tax liability. The net profit from Schedule C flows to Schedule SE.?
Even if you owe zero income tax due to FEIE, you must file Schedule SE and pay self-employment tax unless exempt under a totalization agreement.
Foreign disregarded entities: Form 8858 requirement
If you own a single-member foreign entity (foreign LLC, limited company with one owner, etc.) that's disregarded for U.S. tax purposes, you must file Form 8858.?
What is Form 8858?
Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities) reports information about foreign entities that are disregarded for U.S. tax purposes.?
The form itself doesn't change your tax liability—income and expenses from the disregarded entity are already reported on Schedule C. Form 8858 is an additional information return the IRS requires to track foreign business activities.
Who must file Form 8858
U.S. persons who own foreign disregarded entities or have an interest in transactions involving foreign disregarded entities must file Form 8858.?
Example: You own 100% of a Spanish SLU (Sociedad Limitada Unipersonal), a single-member limited company. For U.S. tax purposes, this is a disregarded entity. You report business income/expenses on Schedule C AND you must file Form 8858 reporting information about the Spanish entity.?
Form 8858 deadline and penalties
Form 8858 is due with your Form 1040 (April 15, or June 15 for expats, October 15 with extension).?
Penalty for failing to file Form 8858: $10,000 per form per year, plus additional penalties for continued non-filing.?
What Form 8858 requires
Form 8858 requires detailed information about the foreign disregarded entity including:
- Entity identification (name, address, country)
- Balance sheet and income statement
- Transactions between you and the entity
- Changes in ownership
- Income and expense details
Foreign partnerships: Form 8865 requirement
If you own an interest in a foreign partnership, you may need to file Form 8865.?
What is Form 8865?
Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) reports information about foreign partnerships where U.S. persons have certain levels of ownership or control.?
Who must file Form 8865
You must file Form 8865 if you:?
Category 1: Control a foreign partnership (own more than 50% directly, indirectly, or constructively)
Category 2: Own a 10% or greater interest while U.S. persons together control the partnership (own more than 50%)
Category 3: Contributed property worth more than $100,000 to a foreign partnership during the tax year (or prior year if the contribution resulted in 10%+ ownership)
Category 4: Had a reportable event (acquisition, disposition, or change in proportional interest) involving a foreign partnership where you own 10%+ interest
Form 8865 filing categories
Each filing category requires different schedules to be attached to Form 8865. Category 1 filers (controlling U.S. partners) must file the most comprehensive information including full balance sheets and income statements.?
Schedule K-1 from Form 8865
Form 8865 generates Schedule K-1 showing your share of partnership income, deductions, and credits. The K-1 amounts flow to your Form 1040.?
Unlike U.S. partnerships, foreign partnerships require Schedule K-2 and K-3 to be attached to every Form 8865, reporting detailed foreign tax information.?
Form 8865 deadline and penalties
Form 8865 is due with your Form 1040 (same deadlines as Form 8858).?
Penalty for failing to file Form 8865: $10,000 per form per year for each category you fall into, with additional penalties for continued non-filing.?
Example: When Form 8865 is required
You and your business partner (both U.S. citizens) each own 50% of a consulting firm registered as a German GmbH & Co. KG (a type of German limited partnership). The partnership generates €200,000 annual profit (€100,000 to each partner).
U.S. tax treatment: You and your partner each file Form 8865 because you each own 10%+ of a foreign partnership that's U.S.-controlled (Category 2). You each report €100,000 (approximately $108,000) on Schedule K-1 from Form 8865, which flows to your Form 1040. You can claim FEIE to exclude up to $130,000 of the partnership income from income tax, but you may owe self-employment tax on partnership earnings.?
Foreign corporations: Form 5471 requirement
If you own stock in a foreign corporation, you may need to file Form 5471.?
What is Form 5471?
Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) reports detailed information about foreign corporations where U.S. persons have certain ownership levels.?
Who must file Form 5471
You must file Form 5471 if you fall into one of five categories:?
Category 1: U.S. shareholders of a Section 965 deferred foreign income corporation (related to 2017 tax reform transition tax—less common now)
Category 2: U.S. officer or director of a foreign corporation in which a U.S. person acquired 10%+ stock
Category 3: U.S. person who acquires stock bringing ownership to 10%+, or who owns 10%+ when someone else's acquisition triggers reporting
Category 4: U.S. person who had control (more than 50% ownership) of a foreign corporation for at least 30 days during the tax year
Category 5: U.S. shareholder of a Controlled Foreign Corporation (CFC)—owns 10%+ of a foreign corporation where U.S. shareholders together own more than 50%
Most expat business owners file as Category 4 (control) or Category 5 (CFC shareholder) filers.?
Controlled Foreign Corporations (CFCs)
A foreign corporation is a Controlled Foreign Corporation if U.S. shareholders (each owning 10%+ of stock) together own more than 50% of the corporation's voting power or value.?
CFCs trigger anti-deferral rules requiring U.S. shareholders to report certain types of income (Subpart F income and GILTI—Global Intangible Low-Taxed Income) currently, even if the corporation doesn't distribute it.
Example: You own 60% of a UK limited company. Your spouse owns 40%. You're both U.S. citizens. The UK company is a CFC (U.S. shareholders owning 10%+ each together own 100%). You must file Form 5471 and may owe current U.S. tax on certain undistributed income.?
Form 5471 schedules
Form 5471 requires numerous schedules including:
- Schedule E: Income, War Profits, and Excess Profits Taxes Paid or Accrued
- Schedule G: Cost Sharing Arrangement
- Schedule H: Current Earnings and Profits
- Schedule I: Summary of Shareholder's Income From Foreign Corporation
- Schedule J: Accumulated Earnings and Profits
- Schedule M: Transactions Between Controlled Foreign Corporation and Shareholders
- Schedule O: Organization or Reorganization of Foreign Corporation
- Schedule P: Previously Taxed Earnings and Profits
Category 5 filers (CFC shareholders) must file the most comprehensive schedules.?
Form 5471 deadline and penalties
Form 5471 is due with your Form 1040.?
Penalty for failing to file Form 5471: $10,000 per form per year, with additional penalties for continued non-filing after IRS notice.?
Additional penalties apply for not maintaining required records or filing incomplete/inaccurate forms.
FBAR for foreign business accounts
If your foreign business has bank accounts, investment accounts, or other financial accounts, you must file FBAR if accounts exceed $10,000 aggregate.?
FBAR applies to business accounts
FBAR (FinCEN Form 114) requires reporting foreign financial accounts where you have financial interest or signature authority. This includes:?
- Bank accounts of foreign corporations you control
- Foreign partnership accounts where you have authority
- Foreign LLC accounts
- Foreign trust accounts
If you're the sole owner of a foreign business, you have both financial interest (you own the entity that owns the accounts) and signature authority (you can control the accounts).
$10,000 aggregate threshold
The $10,000 threshold applies to the combined maximum balance of all foreign accounts you have financial interest in or signature authority over—including personal and business accounts.?
Example: You have $6,000 in a personal foreign account and your foreign business has $8,000 in its operating account. Aggregate: $14,000. You must file FBAR reporting both accounts.?
FBAR deadline
FBAR is due April 15 with automatic extension to October 15 (no extension request needed).?
File FBAR electronically through FinCEN's BSA E-Filing System—it's not filed with your tax return.?
FBAR penalties
Penalties for failing to file FBAR: Up to $10,000 for non-willful violations; up to 50% of account balance for willful violations.
How to claim Foreign Earned Income Exclusion for business income
Foreign business income from active services qualifies for FEIE if you meet the physical presence or bona fide residence tests.?
What business income qualifies for FEIE
Earned income: Income from personal services, including self-employment income, wages paid by foreign corporations you own, guaranteed payments from partnerships.?
NOT earned income: Dividends from foreign corporations, passive partnership income (capital gains, rents, royalties, interest), capital gains from selling business assets.?
FEIE for sole proprietors (Schedule C income)
Net profit from Schedule C qualifies for FEIE if the business involves personal services performed abroad.?
Example: Your Schedule C consulting business generates $95,000 net profit. You meet the Physical Presence Test. You exclude $95,000 using FEIE on Form 2555. You owe U.S. income tax only on amounts exceeding $130,000 (the 2025 FEIE limit).?
But remember: You still owe 15.3% self-employment tax on the full $95,000.?
FEIE for wages from your own foreign corporation
If you own a foreign corporation and pay yourself a reasonable salary, the salary qualifies for FEIE.?
Example: You own a Singapore private limited company. The company pays you SGD 140,000 annual salary (approximately $105,000). You report the $105,000 W-2 equivalent wages on your Form 1040 and exclude the full amount using FEIE. The salary doesn't appear on Schedule C—it's wage income from a corporation (even though you own the corporation).?
FEIE doesn't apply to dividends from foreign corporations
If your foreign corporation distributes profits as dividends, the dividends are NOT eligible for FEIE—they're passive income, not earned income.?
Example: Your UK limited company has £100,000 profit. You take £40,000 as salary (FEIE eligible) and £60,000 as dividends (NOT FEIE eligible). You can exclude the £40,000 salary but must pay U.S. tax on the £60,000 dividends.?
Many expat business owners pay themselves salaries up to the FEIE limit ($130,000) to maximize the exclusion.
Form 2555 to claim FEIE
Complete Form 2555 (Foreign Earned Income) to claim FEIE. Form 2555 requires:?
- Information about your foreign address and employment
- Proof that you meet Physical Presence Test or Bona Fide Residence Test
- Calculation of foreign earned income
- Housing exclusion calculation (if applicable)
The excluded amount from Form 2555 flows to Form 1040 Schedule 1, reducing your taxable income.
Foreign Tax Credit for foreign business income
If you pay foreign income taxes on business income, you can claim Foreign Tax Credit to offset U.S. taxes.?
Foreign Tax Credit vs FEIE
You can use both FEIE and Foreign Tax Credit, but not on the same income.?
Typical strategy: Use FEIE to exclude the first $130,000 of foreign earned income from U.S. income tax, then use Foreign Tax Credit for any income exceeding $130,000 or for passive income (dividends, interest) that doesn't qualify for FEIE.?
Form 1116 for Foreign Tax Credit
Complete Form 1116 (Foreign Tax Credit) to claim credit for foreign taxes paid.?
You must complete a separate Form 1116 for each category of foreign income:
- General category income (active business income, wages)
- Passive category income (dividends, interest, royalties, rents)
- Foreign branch category income (income from foreign branches of U.S. businesses)
Example: Combining FEIE and Foreign Tax Credit
Your foreign corporation pays you $130,000 salary (excluded using FEIE) and $45,000 dividends. You paid $9,000 in foreign withholding tax on the dividends.
U.S. tax treatment:
- Exclude $130,000 salary using Form 2555 FEIE
- Report $45,000 dividends as taxable income
- Claim $9,000 Foreign Tax Credit on Form 1116 to offset U.S. tax on the dividends
- Net U.S. tax depends on your tax bracket and whether the foreign tax exceeds or is less than U.S. tax on the dividend income
Common mistakes filing foreign business income
Mistake #1: Not filing required international forms (5471, 8865, 8858)
Many expat business owners file Schedule C or report foreign corporation dividends but don't realize Forms 5471, 8865, or 8858 are required.?
Consequence: $10,000 penalties per form per year even when you owe zero additional tax.?
Mistake #2: Thinking FEIE eliminates self-employment tax
FEIE excludes income from income tax, not self-employment tax. Self-employed expats still owe 15.3% self-employment tax on Schedule C net profit even when excluded from income tax.?
Consequence: Owing $10,000-$20,000 in self-employment taxes plus underpayment penalties when discovered.
Mistake #3: Not understanding CFC rules and Subpart F income
U.S. shareholders of Controlled Foreign Corporations may owe current U.S. tax on certain passive income and GILTI even if the corporation doesn't distribute it.
Consequence: Underreporting income and owing back taxes when IRS examines Form 5471.
Mistake #4: Taking all business profits as dividends instead of reasonable salary
Many expats structure foreign corporations to take all profits as dividends thinking dividends avoid self-employment tax. But dividends don't qualify for FEIE, while a reasonable salary does.?
Consequence: Paying U.S. tax on dividends when you could have excluded salary income using FEIE.
Mistake #5: Not maintaining required foreign entity records
Forms 5471, 8865, and 8858 require detailed financial information (balance sheets, income statements, transaction records). Many expats don't maintain this documentation.?
Consequence: Additional penalties for not maintaining required records, difficulty completing forms accurately, and IRS examination complications.
Mistake #6: Missing FBAR for business accounts
Many expats file FBAR for personal accounts but forget that business accounts also require FBAR reporting.?
Consequence: FBAR penalties of $10,000+ per year for unreported business accounts.
Mistake #7: Not coordinating foreign entity structure with U.S. tax classification
Some foreign entities receive unfavorable U.S. tax treatment by default. Not understanding how your foreign entity is classified for U.S. tax purposes creates inefficiencies or compliance problems.
Consequence: Overpaying taxes or facing unexpected filing requirements.
Foreign Business Reporting Requirements (2025)
|
Business Type |
Main Tax Form |
International Form Required |
FEIE Eligible? |
Self-Employment Tax? |
Penalty for Missing Form |
|
Sole proprietor (no entity) |
Schedule C |
None (unless meets thresholds) |
Yes |
Yes (15.3%) unless totalization agreement |
N/A |
|
Single-member foreign LLC/company (disregarded) |
Schedule C |
Form 8858 |
Yes |
Yes (15.3%) unless totalization agreement |
$10,000+ |
|
Foreign partnership (10%+ ownership) |
Schedule E or K-1 |
Form 8865 |
Yes (on earned portion) |
Depends on partnership type |
$10,000+ |
|
Foreign corporation (10%+ ownership) |
Dividends on 1040 / wages if employed |
Form 5471 |
Only on salary, not dividends |
No (on dividends); Yes on guaranteed payments |
$10,000+ |
|
Foreign trust (grantor/beneficiary) |
1040 / various |
Form 3520 / 3520-A |
No (trust income is passive) |
No |
$10,000 or 35% |
?
Step-by-step filing process for foreign business income
Step 1: Identify your foreign entity type
Determine how your foreign business is classified for U.S. tax purposes: sole proprietorship, disregarded entity, partnership, or corporation.?
Step 2: Gather financial records
Collect all income and expense records, foreign entity financial statements (balance sheet, income statement), foreign tax payment records, and bank account information for FBAR.
Step 3: Convert foreign currency to USD
Convert all foreign currency amounts to U.S. dollars using consistent exchange rates (transaction date or average annual rate).
Step 4: Complete primary tax reporting
Sole proprietor/disregarded entity: File Schedule C
Partnership: Report K-1 income on Schedule E or Form 1040 as appropriate
Corporation: Report wages on Form 1040 line 1, dividends on Schedule B
Step 5: Complete required international information forms
Disregarded entity: Form 8858
Partnership (10%+ ownership): Form 8865
Corporation (10%+ ownership or control): Form 5471
Step 6: File FBAR for foreign business accounts
If aggregate foreign accounts (personal + business) exceed $10,000, file FBAR by October 15.?
Step 7: Claim FEIE if eligible
Complete Form 2555 to exclude up to $130,000 of foreign earned income from U.S. income tax.?
Step 8: Claim Foreign Tax Credit if applicable
Complete Form 1116 to claim credit for foreign taxes paid on income exceeding FEIE limits or on passive income.?
Step 9: Calculate self-employment tax
If you have Schedule C income, complete Schedule SE to calculate 15.3% self-employment tax (unless exempt under totalization agreement).?
How NSKT Global can help with foreign business tax reporting
NSKT Global specializes in international tax compliance for U.S. expats operating foreign businesses, ensuring accurate reporting across all required forms while minimizing tax liability through strategic use of FEIE and Foreign Tax Credits.
We offer comprehensive foreign business services including entity classification analysis determining how your foreign business is treated for U.S. tax purposes and whether restructuring would reduce taxes, Form 5471 preparation for foreign corporations with detailed schedules and CFC compliance, Form 8865 preparation for foreign partnerships including Schedule K-2/K-3 requirements, Form 8858 preparation for foreign disregarded entities, and FEIE optimization structuring compensation to maximize Foreign Earned Income Exclusion benefits.
Whether you're operating a sole proprietorship or freelance business abroad, own shares in a foreign corporation receiving dividends, partner in a foreign business with other U.S. or foreign persons, or starting a new foreign business and need guidance on optimal structure, our expertise ensures you file all required international information returns avoiding $10,000+ penalties per missed form, minimize combined U.S. and foreign taxes through strategic FEIE and Foreign Tax Credit use, properly calculate and report self-employment tax or claim totalization agreement exemptions, and maintain full compliance with Schedule C, Form 5471, Form 8865, Form 8858, FBAR, and all requirements for foreign business operations.
