LLCs And Taxes For Expat Amazon Sellers

By Vincenzo Villamena, CPA

When starting an Amazon business, every seller needs to understand the available business structures and Amazon seller tax implications.

The best business structure for Amazon sellers

A business structure should provide liability protection, especially when doing business in the United States, one of the most sue-happy countries. In addition, the right legal structure can help minimize the tax liability.

So what is the right legal structure?

Well, it depends. One of the key factors that affect the choice of business structure is where the Amazon seller is from and where he or she is located. Amazon seller tax differs for:

• US Resident
• US Citizen or Green Card holder living outside the United States
• Non-US person

Let’s look at business structures and taxation for each group.

US Residents with Amazon business benefit from an LLC or S-Corporation

A US resident for tax purposes is not only a US citizen or green card holder living in the U.S. The IRS considers anyone who spends enough time in the U.S. to pass the Physical Presence Test a United States tax resident.

US residents should incorporate in their state of residence and/or where the business is being performed (i.e. where the office or dedicated warehouse is located). Forming an LLC is a good start as it protects their personal assets in case they get sued. With regard to taxes, if an LLC is the best choice for an Amazon seller depends on the income level.

An LLC is a disregarded entity. This means that the income is not taxed on the company level but passes through to its members. Each LLC member reports their share of income on their individual tax return.

LLC vs S-Corp for Amazon sellers

If you expect that the net profit of the LLC exceeds $30,000/year, an S-Corp might be more tax beneficial. With an S-Corp, you are an employee with a salary instead of being self-employed. This can significantly lower your self-employment tax. (Read more about LLC vs S-Corp here, and about when to switch from LLC to S-Corp here.)

If you already have an LLC you can simply file IRS Form 8832 to elect for the LLC to be treated as S-Corp. You must make this election by March 15 for it to apply for the full tax year. New LLCs have 75 days to elect S-Corp taxation for it to be applicable in the first tax year.

The 20% pass-through deduction is not available for employees though. However, a shareholder can apply the deduction to the shareholder’s share of QBI reported on Schedule K-1.

More business structure options for US Citizens or Green Card holders living outside the USA

Many American expats and digital nomads run successful Amazon businesses. Without a residence or place of business in the United States they can select where they want to incorporate.

The more familiar structure would be an LLC or S-Corp in a state like Delaware or Wyoming. Similar tax considerations apply as for US residents. In addition, income up to about $100,000 made while living abroad could qualify for the Foreign Earned Income Exclusion (FEIE) if certain requirements are met.

Furthermore, as a US business, it would qualify for the 20% pass-through deduction available to US-based LLCs and S-Corps for the net income above the $100,000 FEIE.

American expats, entrepreneurs, and digital nomads should look beyond the familiar. They should explore an offshore company in a low tax jurisdiction. If you have no office, employees, or dependent agents in the States, then an offshore company might work for selling on Amazon.

Incorporating in a place such as Hong Kong, where sellers can easily buy their stock from China and resell in the U.S. would be a way to use a great jurisdiction to create an optimal situation. The effective corporate American tax rate is 10.5% and the owner can receive a $100,000 salary free of income, social security and Medicare taxes thanks to the FEIE.

Some structures even use a consolidated hybrid, where a foreign corporation owns a US LLC which is a disregarded entity. The optimal structure depends on the permanent establishment rules in the tax treaties the US has many with foreign countries. Please consult your tax advisor, as each situation is different. There is no one size fits all solution.

Non-US person selling into the United States can benefit from a LLC or a C-Corporation

A non-US person is someone who is not a US citizen or Green Card holder and does not spend enough time in the States to pass the physical presence test.

A foreign-owned LLC, meaning an LLC owned by a non-US person, can potentially be exempt from American federal income tax if it has no presence there in form of offices, warehouses, or employees/dependent agents. However, the tax-free status of a foreign-owned LLC relies on an aggressive interpretation of the US tax code. Furthermore, it still must file form 5472 every year to report all “reportable transactions”.

Another good business structure for non-US Amazon sellers is a C-Corporation. When services are performed outside the US by a non-US person, the associated income is considered foreign-sourced. Low US tax rates, even down to zero percent, apply to this income.

Contact us to learn more about how you can optimize your Amazon seller tax situation.