The life of a nu nomad is often a ground-breaking one. Not only is living and working remotely vastly different than that of the sedentary life back at home, but the management end of your mobile lifestyle often finds itself within the grey area of how business is conducted—from how you generate revenues to minding your tax obligations. Just because you are no longer residing/working in your home country* does not mean that you are free of the tax man.
For those who work while traveling abroad there are tax options and considerations that differ with how you live. Here are the classic models:
- The Business Traveler. This type of traveler is the most familiar. He (we’ll just use the pronoun “he” for simplicity sake) travels abroad for business reasons, stays as needed to conduct business, and then returns home once business is concluded. With the exception of the allowance of a few days to rest before returning, it is all a business trip. Therefore, all expenses should be deductible.
- The Expatriate Working Abroad. This is the sort of person who leaves home to live and work in another country. This model has its own benefits. According to Sur Novel of Novel Group LTD, if you are working in any one single country for less than 183 days “permanent establishment,” you may not be taxable there. However, as a US citizen you are always technically going to be subject to tax. But there is a US $87,500 foreign income exclusion for US citizens working abroad. In other words, your first US $87,500 of income from that foreign country is potentially tax free, but you can be taxable at US progressive rates if you are residing for more than 183 days in a jurisdiction with a lower tax rate than what you would be taxed at in the US. Anyway, that’s not the situation for the nu nomad.
The third model, the one most reflective of the mobile professional, resembles less like the traveling business person as the work-at-home professional he actually is.
Firstly, it is important to remember that just because your home-based business is transitory (mobile) does not—for the most part—change the dynamics of your tax situation. Certainly there are questions for when a situation is business related and when it is simply personal travel, but with some common sense and reliable guidelines you will be able to adhere to your tax responsibilities with minimal confusion. We offer these primary tax assumptions (which conform to United States and Canadian tax laws) supplied by Joseph Smith of Travel Tax:
- You cannot travel the world and claim it as a business trip if your clients are located in your home country. The mobile professional is not a business traveler, but is considered an operator of an in-home business, even though the location changes frequently.
- Where you are doing work becomes your “tax home.” Just as you would deduct a portion of your expenses as part of an “at home business,” you can potentially do the same in a place that you stay at, like a hotel room, inn, guest house, et cetera. A home office deduction is based on square footage of exclusive business space versus the total area of the dwelling. Example: If you are renting a single room bungalow and you have allocated 40% of the area as exclusive working space, then 40% of the rental cost and utilities is considered an office expense. (To support this claim it is a good idea to create a floor plan of that space, identifying what area is dedicated for work.) Also, your deducted work space is not congruent to any specific amount of hours worked.
- Definition of Tax Home. The primary definition of a tax home is your primary place of income, not source, but where it is physically earned. You can have an “official office” in your home city (let’s say, Los Angeles) where mail is sent to and voice messages retrieved (this would be considered your source of income location), but since you are working out of your away office (let’s say Bali), you would call the Bali location your Tax Home.
IRS Publication 463 states that if you have no primary place of income, then for you to have a fixed tax home, it must meet two out of three of these tests: 1) Income at the place you claim you have a home and you use that place for lodging, 2) Substantial and continual expenses in keeping a dwelling and you use that dwelling when you are in town, 3) You have not abandoned the area that you call home (e.g.: your Los Angeles office) and keep all legal ties et cetera.
- Periodic business trips as a Nu Nomad are permissible. You can still claim business trips as a deductible expense if it is required of you to travel elsewhere. Example: You travel overseas as a Nu Nomad (let’s say Bali), rent a bungalow and have begun working on your client accounts (you’re doing business). This would be your current “tax home.” But then you are contacted by a prospective client in Sydney who requires a presentation by you in person. In this case, the cost of traveling to and from Sydney from Bali, along with all other related business expenses (e.g.: meals, lodging, transportation, et cetera) is considered a standard business trip expense. This scenario would also hold true if you were returning to your home country (USA) for specific business purposes. (As long as you return to your tax home of Bali immediately after business is concluded.)
From this information alone, already many key issues have been clarified. One thing to keep in mind is that your at-home business is a transient one, subject to the same tax obligations and benefits as if it were in a fixed location.