Are you ready to do business in the United States or currently in the process? You can reach out to more customers and get more market share, but you also have to pay taxes. Understanding how engaged in trade or business (ETB) works and what counts as taxable revenue can help you grow in a booming market while preparing for taxes.
What is ETB?
ETB is a legal term that refers to business owners who live outside the United States and run their businesses within the U.S. This distinction does not refer to foreigners who invest in assets like U.S. stocks and commodities through a broker, custodian or commission agent. ETB applies to people who have their own businesses and services in the U.S. If your business activity counts as ETB, you will owe U.S. taxes on the revenue you make from your business operations in the U.S.
Examples of Businesses Engaged in U.S. Trade or Business
The IRS details various business activities that count as ETB. Knowing if your business activity is treated as ETB is important for tax purposes. ETB companies have to pay federal taxes, and some companies may also have to pay state and local taxes. If these examples sound like your business model, chances are you are ETB and subject to U.S. taxes.
Importing and Exporting Goods
Companies that import and export goods in the U.S. may be subject to ETB. Food companies exporting goods to the U.S. are engaged in U.S. trade or business. Foreign businesses that receive merchandise from a U.S.-based company to sell in their locations are also engaged in U.S. trade or business.
Providing In-Person Services
Businesses that provide their services in the U.S. are considered ETB. A restaurant based in Europe with branches throughout the United States is providing services to U.S. citizens. The revenue from the restaurants based in the U.S. is subject to U.S. net-basis income tax. The same rule applies to a hotel chain with headquarters outside of the U.S. Any of that company’s revenue from hotels in the U.S. get taxed because those proceeds are based on business operations within the U.S. This category extends to people selling merchandise, products and other services.
If your business is located outside of the US, and your services (i.e consulting, photo editing, artistic creations, etc.) are being purchased by US customers online, that income is not considered ETB.
Investing in US-based Companies
If your business is only investing in stocks and commodities, this does not count as being engaged in U.S. trade or business. However, if you buy real estate and make rental income, those proceeds count as ETB.
Requirements for Engaging in U.S. Trade or Business
Want to know whether your company is considered as ETB or not? These are the conditions that result in a company being engaged in U.S. trade or business.
- Having a physical place of business beyond just a registered agent address
- A regular and continuous presence in the U.S.
- Being actively engaged in the business of providing goods or services to U.S. customers
- The foreign entity must have a U.S. taxpayer identification number, file U.S. income tax returns and other forms and be subject to U.S. tax laws.
Tax Implications of ETB
Companies engaged in U.S. trade or business must pay federal taxes on earnings generated from their U.S. assets. Depending on the context, the business owner may also have to pay state and local taxes. The amount you pay depends on your taxable income. Companies can use deductions to trim their tax bills even if they are not based in the U.S.
Once you know your taxable income, the tax brackets determine how much you will have to pay. The IRS adjusts the tax income brackets each year.
Benefits of ETB
Engaging in U.S. trade or business presents business owners with many benefits. Take a look at some of the most noteworthy.
Reduced Import and Export Costs
Trading in the U.S. can help lower your importing and exporting costs. Reducing these costs will improve your profit margins and can introduce you to a larger market. Some companies make goods or find materials in the U.S., which helps them avoid some of these costs.
Larger Customer Base
The United States has over 314 million residents. Engaging in business with the U.S. increases the size of your customer base and can generate additional revenue for your company.
Engaging in business in the U.S. can give you more deductions for your company. Itemizing these deductions can lower your tax bill and help you save money while growing your business.
Engaging in U.S. trade helps your company expand its footprint. Business owners can purchase commercial properties in the U.S. and reach new customers. They can also buy warehouses to store products to provide more efficient shipping solutions.
Engaging in U.S. trade or business can strengthen your company’s legal protection. You can separate your personal assets from your U.S. operations. Companies can also establish the U.S. segment as a separate operation from the global operations.
Engaging in U.S. business can help you get exposure to the financial markets and explore more investment opportunities.
Things to Remember When Engaging in ETB
Getting customers in the U.S. can create more opportunities for business owners. It’s a large market, but you should remember these key points before engaging in U.S. trade or business.
- Different types of taxes may be applicable, such as income tax, employment tax and self-employment tax.
- Various federal and state laws may be applicable, such as minimum wage laws, labor laws and employment discrimination laws.
- Licensing or registration requirements may be imposed by the state or local government.
- ETB has various filing requirements. You may want to talk with a tax professional to ensure you are filing your taxes properly.
- Different types of insurance coverage may be applicable.
Growing Your Business with US Activity
The United States is filled with opportunities. Foreign business owners can expand their operations and offer their services to a vast customer base. Growing your company in the U.S. can be very beneficial, but you have to stay on top of taxes. Reliable bookkeeping software can help you with tracking expenses and planning out your taxes.
What is considered a trade or business in the U.S.?
A trade or business in the U.S. is a foreign company that provides products or services within the U.S.
What are the applicable taxes for businesses engaged in U.S. trade or business?
Businesses ETB will have to pay federal taxes. Some companies also have to pay state and local taxes.
What are common misconceptions about U.S. trade or business?
There are several misconceptions about ETB. One of those misconceptions is that the U.S. is losing out to emerging markets. While emerging markets have been fluctuating and some have seen significant growth, U.S. exports have remained relatively stable.