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I run a one man consulting company as an S Corp here in the USA. I was wondering if an alternative arrangement would put me in a better situation for taxes (my goal is legally reducing my taxes, not tax evasion.)

So what I was thinking is if I create a c corp in a country with zero capital gains tax like the Caymans, the company can bill my clients and store the money in the corps bank account. Then I can pay myself from that salary, expenses and dividends, and the money would sit offshore and can be invested and grow tax free, and I only pay taxes on salaries and dividends when they are repatriated into the USA.

The corp would be a legally separate entity, in a different country, so not subject to US taxes. My goal would not be to evade reporting requirements at all, and I would be fine with reporting, but it isn't obvious why the IRS would require a report on a foreign corp. I know there are foreign bank account reporting requirements, but that wouldn't be my bank account. So, from what I can see that corporation would effectively be like an unlimited 401k where I can contribute any amount and withdraw any amount without penalties.

My income is VERY variable from year to year, so some years I get pushed into ridiculously high tax brackets, this would also allow me to smooth out my income to a more consistent level.

One downside I see is that those capital gains I made in the corp would be taxed at ordinary income rates, though I suspect a little bit of messing around with share buy backs and stuff like that might be able to handle that too.

Are there special IRS rules to deal with this and circumvent it? Are there any other flaws in this plan that I should be aware of?

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    S-Corp is a US tax code designation. There are metric tons of flaws in this plan. – quid Jul 10 at 20:39
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    Depending how you structure things you may have to report your interest in this foreign company as an offshore asset as you'll effectively hold its stock. – Vality Jul 10 at 20:42
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    Really, if you want to play games with the IRS you should check with a certified professional before doing anything. Trusting internet advice about these things can cause you lots of trouble. Remember that it is their game, that they play it every day and they have been playing it for longer than you have been alive. – SJuan76 Jul 10 at 20:45
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    You’ll run afoul of the FATCA reporting requirements at the very least, and then your offshore system will probably be classed as a pass through entity, meaning you’re stuck with US taxes. As others have said, see a professional. You get what you pay for here. – Peter K. Jul 11 at 1:17
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Yes, there are several and more flexible ways you can accomplish tax deferral like a 401k.

Yes, it can involve corporations created in a United State or a different Nation state, or a state within a different nation state (some countries have nation level incorporation like the Cayman Islands, some have state level incorporation like the United States, some have state level and nation level incorporation statutes like St Kitts & Nevis).

Your plan though has bad assumptions and is flawed. You can ignore the answer about the costs of finding a tax professional, you can get brand new legal consultation and entity setups in multiple countries for less than $10,000, after you have decided which countries.

A) Corporations owned by American citizens have as much trouble getting a foreign bank account as an American citizen.

Counterpoint A) Offshore Corporations don't need bank accounts. See if you can structure your business to either be simply a holding company of assets, or if your business can get payments solely in cryptocurrency. You pay tax on whatever it transfers to you domestically, so you can cash out your crypto in US institutions when it pays you. Or your entity can just transact internationally for the things you really want. Its just an accounting gimmick at this point, since cryptocurrency wallets are property that you have to merely label as being part of one entity or your personal balance sheet. This remains an accurate capability no matter what anyone told you about cryptocurrency.

B) American beneficial owners of foreign bank accounts have to report FBAR. Foreign Banks are required to snitch on you due to FATCA, despite their country's own laws and constitutions because the country's sold out their sovereignty in the FATCA treaty with the United States. This is why foreign banks don't want to deal with Americans.

Counterpoint B) Offshore Corporations can have US bank accounts without creating tax liability. Big banks are typically confused at how to do it, especially when the beneficial owner is an American citizen. Boutique banks will just appreciate the business. Shop around. US Banks are not subject to FBAR. US territories are where the real gems are, because of their familiarity and proximity to foreign countries.

Also, cryptocurrencies holdings are not subject to FBAR. Reiterated by 2019 US Treasury and FinCEN guidance. But it wasn't ever really unclear.

C) US Taxes still applicable, but different ones: A US citizen beneficial owner of a foreign corporation has to consider Treasury and IRS regulations on Subpart F income, of which there are MANY exception, Controlled Foreign Corporations (CFC), and Passive Foreign Investment Companies (PFIC). Often times the result is still WAAAAAY lower than US income taxes, and you can basically ignore the states on this one, but it depends on which state.

D) Discretion. So yes, at the strictest interpretation taxes still apply, and the banks themselves will snitch, the countries are often in agreements to snitch on you, and your own compliance has the effect of telling the US government how much there is to tax. But you aren't inaccurate in your observation that beneficial ownership doesn't have to be known. There is just huge liability for you if it 1) becomes known 2) the US government disagrees with your tax deferral and compliance.

so thats the topic of foreign corporations. these are usually more useful for everything EXCEPT not paying taxes to the US government. So if you want to stall creditors, grifters, transact in privacy as a matter of trade secrets, and do crafty things with the price of assets that are owned, foreign corporations are pretty golden.

back to the root of your question, consider 501(c)(3) private foundations. But not for income, it has to grow on its own from income you have donated to it. But you can deduct 30-60% of your income to them. So thats way better than 401ks. It isn't NECESSARILY a tax deferral, but probably will be if you need to pay yourself.

Also consider moving to Puerto Rico. Many US entrepreneurs move there for Act 20 and Act 22, since there is an exemption on capital gains and income taxes. And you still get the US flag and institution. It isn't a tax deferral. But people typically go there for 1 year to cash out of large capital gains tax free, not to actually make a living like it seems like you need to do, but thats possible too if your commerce is mostly online.

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My income is VERY variable from year to year, so some years I get pushed into ridiculously high tax brackets

Have you quantified this additional liability? This is the federal bracket table for 2019:

Rate      Unmarried Individuals,    Married Individuals     Heads of Households,
          Taxable Income Over      Filing Joint Returns,    Taxable Income Over
                                    Taxable Income Over  
 10%              $0                           $0                     $0
 12%          $9,700                      $19,400                $13,850
 22%         $39,475                      $78,950                $52,850
 24%         $84,200                     $168,400                $84,200
 32%        $160,725                     $321,450               $160,700
 35%        $204,100                     $408,200               $204,100
 37%        $510,300                     $612,350               $510,300

If in one year your taxable income (net of your expenses) is $50,000 you'll owe a total of $6,858.50 in federal taxes your top marginal rate is 22% and only $10,525 of your income is subject to that rate. Your "effective" rate would be 13.7% ($6,858/$50,000). Your post-tax net income is $43,142.

If your income the next year was $150,000 you'll owe a total of $30,174.50 in federal taxes your top marginal rate is 24% and $65,800 of income is subject to that rate. Your "effective" rate is 20.1%. Your bottom line income is $119,825.5. Your income tripled and your net income is 2.77x higher.

Hypothetically, if you could avoid the jump to the 24% bracket keeping your top marginal rate at 22% you'd owe $28,858.50 and your effective rate would be 19.2%.

When you're self employed there are more pension options than a 401(k) that are a whole lot more simple than setting up a company in a different country. With a SEP IRA you can contribute 25% of your income up to $56,000 for 2019; so at $150,000 of income you can hide $37,500 from taxation. (As an aside there are also Solo 401(k)s and profit sharing pensions with higher limits than you read about for employee 401(k) contributions.)

Obviously state income taxes, where applicable, would also need to be considered but if you have a consulting business you should probably set yourself up an LLC to separate personal from business assets regardless.

If you're talking about really big income numbers, it would probably be in your best interest to talk to a talented business manager or financial adviser; but even still the difference in taxation of your $204,101st dollar is only 2% lower than your $510,301st dollar. Your incentive to avoid taxes at the federal level doesn't really begin until you're over $160,725 as the 8% marginal increase is actually a meaningful difference.

You may want to spend some time understanding pension and retirement options available from the perspective of the employer before concocting some complicated and flawed foreign pass-through entity.

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You don't have to flee the country to smooth out the peaks and valleys in your income. Simply opening a business and paying yourself a salary rather than just passing the income through the company will do that for you.

Opening an offshore business for tax reasons legally is going to be quite expensive and difficult. You're gonna need a tax specialist that doesn't just know the US tax system but also foreign income regulations. You're gonna need a lawyer that doesn't just know US corporate law, but also the Cayman Island's.

There's probably many other legal and tax questions that neither of us have considered. Talk to a good CPA first, figure out everything you can do within the US, legally, to reduce your tax burden. If you don't get satisfactory results you can start researching other options.

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