Helping Foreign Entrepreneurs Navigate the US Tax Code with David McKeegan

0:01Boom! Shake the room, Fire Nation! JLD here and welcome to Entrepreneurs on Fire! Brought to you by the HubSpot Podcast Network, the audio destination for business professionals with great shows like Creator Science. Today, we'll be breaking down how to help foreign entrepreneurs navigate the U.S. tax code. To drop these value bombs, I brought David McKeegan into EO Fire Studios. David founded Clear back in 2016 when he saw the needs foreign founders of U.S. startups were facing. David is a seasoned entrepreneur and passionate about helping fellow entrepreneurs. In today's foundation, we will talk about the tax issues that people encounter when entering the U.S.

0:36market as a foreigner, how to stay compliant so we don't get torpedoed from the IRS, and so much more. And a big thank you for sponsoring today's episode goes to David and our sponsors. Success Story, hosted by my friend Scott D. Clary, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Success Story features Q &A sessions with successful business leaders, keynote presentations, and conversation on sales, marketing, business, startups, and entrepreneurship. In a recent episode, Scott brings Kate Bradley on the show, founder and CEO of Lately.ai, to discuss the best ways to use AI to create content.

1:09Listen to Success Story wherever you get your podcasts. David, say what's up to Fire Nation and share something that you believe about becoming successful that most people disagree with. Hello, Fire Nation. So I think one thing that most people believe that I disagree with is that you need to be stationary or tied to a specific location when you're starting and running your business. When Carrie and I started Greenback back in 2009, nobody was working remotely. It just wasn't really a thing. And people would say things to us like, well, you know, it can't really be a real business if you don't have a filing cabinet and an office.

1:56But we grew that business over about 14 years from zero up to a successful private equity exit. And while we were doing that, we lived in eight different countries and had three children on three different continents. Yeah, I love that. And David, I mean, we were talking pre-interview chat as well. I mean, you're in Costa Rica. I'm in Puerto Rico. I'll never leave this enchanted island. I mean, it doesn't hurt that you don't pay federal or state tax in 0 % capital gains in Puerto Rico, which is kind of around the topic that we're talking about, which is helping foreign entrepreneurs navigate the US tax code.

2:33I just said, forget about the US tax code. I'm moving to the Caribbean Island, to Puerto Rico to escape it all, but not everybody can do that. So what the heck is the deal with your story of exiting Greenback after 14 years? Let's start there as we flow into this amazing topic? For a long time, we were getting approached by private equity companies, investors, all these kind of folks. And we largely just ignored them. We were just head down, building the business. Carrie was running it. She was the CEO. I was helping out wherever she told me she needed help. And the business was doing great. We were grown by double digits each year.

3:13We had a very healthy profit margin and everything. And then it got to a point where we thought, you know we want to have the free time and the free headspace to do other things and you know we had a lot of conversations around that we said okay well you know let's start taking some of these phone calls let's see what people have to say and we started taking phone calls uh let's see about mid or beginning of last year so beginning of 2023 and within like two months i think we had three or four different term sheets from different private equity companies, search funds, things like that. So we narrowed that process down with those term sheets, talking to the companies, all those things that you do.

4:04And over the course of the next eight months or so, we went through a full diligence process. We got to the point where they wanted to buy us and then they had to find a CEO to run the business because we didn't want to run the business for the private equity company. And then finally, we closed in April of 2023. It was pretty fantastic. What would you say were the main things that you learned from that process? If you could just give Fire Nation maybe two or three things that you really would say, man, I wish I had known that, or thank God I didn't know that, that could really help out the listeners if they were to experience something similar?

4:43I used to be a banker and I worked on the buy side. So I've done processes like this before, syndicating loans out to people and things like that. What I was most surprised about in this process though, was how long it took. And you feel like you're walking on a knife's edge every day because you don't know what the other party is thinking. You don't know if they're thinking this is the greatest thing since sliced bread or if they're thinking, you know what, maybe we just take a pass on this. But one thing I think we did well is we just had a lot of very open, honest conversations with the deal team of the private equity company that was buying us.

5:30And I think that helped a lot because I think we were able just to have conversations that were much more open and honest than I think you normally find in these kinds of situations. Anything else before we move on that you think would be really helpful for somebody that's potentially going to be going through a process like this in the future? You know, however long you think it's going to take, double that. And then Fire Nation, patience. Now, what's pretty interesting is you exited Greenback after 14 years, but then you started Clear Tax. So was there some kind of non-compete clause or timeframe that happened there?

6:11And kind of talk us through that process and why you decided, you know, after, you know, what I foresaw as like you were just retiring to Costa Rica to sip margaritas on the beach, but now you gave yourself a job. What happened? We actually started Clear a bit before the exit and it came about, you know, you know, Dan and Neen over at the Dynamite Circle. It came about at one of their conferences that Carrie and I attended in Bangkok. So they had a speaker on the stage. I tried to pitch that speaker on our greenback on the expat tax services. And it was a total crash and burn. You're in a room with 300, 400 other entrepreneurs and just completely got shot down.

6:57If it wasn't so embarrassing, it would have been funny. And what happened then is I didn't hear from the guy for a couple of weeks, but then I got an email out of the blue and he told me he had a problem. He took a job with this company and they needed to do about a whole bunch of tax returns almost immediately. and they didn't have anybody that could do it. So being the entrepreneurs that we are, we spent the weekend putting together a website, built out what I would describe as a rather poor backend. And that was the start of the business. I called them up on Monday and said, we're ready to start taking clients.

7:39And they immediately started sending clients over to us, all these small corporations to help them get their taxes done. And it was outside of the scope of what the expat business did, because that was dealing all with individuals, personal tax returns, things like that for Americans living outside the U.S. This was almost the exact opposite, where it was all corporate tax work, and a lot of it was for non-U.S. persons. It was a lot of entrepreneurs that live outside the US. Fire Nation, I really kind of think this is a cool idea where you can say, you know what, if I'm going to be exiting out one thing, do I have some engines rolling in another area?

8:22Can I get some momentum going and maybe test a few things out? Because frankly, as a lot of us know, the hardest part about any business is getting that initial traction, that initial momentum, that proof of concept. So you may need to try a few things out as you're kind of unwinding before you're able to just step into of something that you know is going to be able to move forward with that type of proof of concept. So a lot of decent ideas and topics being chatted about here, but we're really going to be diving into tax issues when we get back from thanking our sponsors. You know your customers want fast, personalized support, but how do you find a customer service solution that actually delivers?

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9:30And that means increasing retention by more than 80%. Plus with Service Hub, you get a full 360 view of your customers on one smart CRM that brings marketing sales service and success teams together to work smarter while you watch your business grow. Visit hubspot.com slash service to learn how this all new solution can help you deliver for your customers. Dave, we're back. And listen, I want to talk now about the tax issues that people encounter when they enter the U.S. market as a foreigner. So if foreigners are listening to this right now, what do they need to know about the issues they're going to encounter?

10:07And let's keep the chat going about the best ways that they can prepare and just set themselves up for success in this area. There's an old joke that the U.S. is where foreign businesses go to die. There's a lot of different reasons for that. The U.S. is a very competitive market. They have different rules than a lot of other countries. U.S. GAAP is the accounting standard as opposed to the international version of GAAP. We've got 50 states. Each of the 50 states has different rules on how they tax things and what sales tax they charge, what income tax they charge, all these different things. And it can be really overwhelming for people, especially if you're not from the U.S.

10:51or you don't have any basis or any understanding in how the tax code works. And then you have to add on top of that that the rules aren't the same for businesses that are owned by non-U.S. persons. When a non-U.S. person owns a business, they have all sorts of different reporting requirements that they have to complete and submit to the IRS. And if they don't, they get hit with these automatic penalties, which really are enough to blow up most companies, especially early-stage startup companies. If you miss one of these things, it can be disastrous. And the big problem is that a lot of the local CPAs, a lot of the local accountants don't really know or understand these rules because they don't work with a lot of non-U.S.

11:41people. They're mainly working with local people doing local things. They're not used to the international side of it all. So if we had some people that are listening right now, what would you say the first one, two, or maybe even three steps that you'd recommend they do if they're going to be making this transition, if they're going through some part of this process? If you're a non-U.S. person, I mean like not a U.S. citizen, not a U.S. corporation or something like that, and you're moving into the U.S. markets, you need to be aware of the additional reporting requirements that you have. So there's different forms out there, 5472, 5471.

12:23Those are basically reporting ownership of a foreign company or reporting ownership of a U.S. company by a foreign person. And those are very important because if you don't fill those out, they come with automatic penalties that are huge. So if you don't complete a 5472 on time, you will get hit with an automatic$25 ,000 penalty. And it doesn't matter if your business is active or inactive. It doesn't matter if you've sold a single dollar worth of your product or service. You will still get hit with this penalty if you don't fill out this form. The 5471 is a$10 ,000 automatic penalty. So if you own a foreign corporation, let's say you have a U.S.

13:13C-Corp and that C-Corp owns another company overseas. If you don't fill out that$54.71, you're going to get that$10 ,000 penalty. And again, this is not chump change for a lot of businesses. This is the difference between making a profit or making a massive loss for the year. And then there's other things that keep coming out. You know, this year we all have to deal with the FinCEN beneficial ownership issue, you know, reporting the ownership of all these companies. You know, foreigners probably have foreign bank accounts, so they have to report those bank accounts to the FinCEN as well. And then, you know, as you dive down deeper and deeper, let's say your business starts being active and starts doing well, you know, you have to make sure that you're reporting everything using U.S.

14:00Gap, not international Gap. You have to make sure that any states that you have nexus in, you're managing the sales tax, that you're managing the income tax, all these different things in all these different places. And we get people coming to us all the time who ask for one thing, and they don't realize that they need two or three different things as well. So somebody will come to us and say, hey, I've got a company set up in Delaware. Can you help me file the franchise tax? And of course, we say, yeah, no problem. We'll help you do that. We get that done. And then we say, oh, by the way, who's doing your federal tax?

14:39They say things like, what do you mean? I have to do something else? It's like, oh, yeah, there's a lot more you have to do. Now, that's kind of the point I really want to dive deeper into next, because we've been talking about it. But let's get real clear how these individuals can stay compliant so they don't get torpedoed from the IRS. It's going to depend a little bit on what kind of business entity you have. But a lot of folks will come to the U.S., they'll open up a C-corp. Arguably, that's the most standard business structure. That's what Facebook and Google are. That's what a lot of big companies are.

15:14And Delaware is a pretty popular place to do that, especially for companies that are looking to try and raise capital in the U.S. because a lot of people come to the U.S. looking to raise capital. So if you have a C-Corp in the U.S., you're going to need to file a Form 1120 each year. That's sort of the standard form that all C-Corps have to file. Now, if you're a foreign owner, then you also need to file Form 5472. This is reporting the foreign ownership of that company. This year, you'll also need to do the FinCEN beneficial ownership. And if the foreign company or if the company has any bank accounts overseas, you'll also need to report those bank accounts via the FinCEN 114 to the IRS.

16:09So, you know, right there you have like the high level federal part of it. If you're incorporating Delaware, you also need to file the Delaware franchise tax each year. And that due date just passed. That was March 1st that had to be filed by. Otherwise, you get hit with a$200 penalty if you haven't filed that. The last thing you would have to look at is any state tax issues. Do you have any nexus in any of the 50 states? Are you selling enough in any of the 50 states to require paying sales tax there? And that's a whole other can of worms that you have to work through, trying to make sure that you're completely compliant on the state side of things.

16:55So we've been talking a lot about how you specifically, but just how information can help foreign entrepreneurs navigate this US tax code. So if you wanted to make sure that our listeners left with one thing in mind, one thing they could really walk away with from this episode, what would that one thing be? The one thing I would tell everybody listening to this right now is go out and get yourself an extension. Do it before the April 15th deadline because that'll give you a little bit of time to try and understand what you need to do. If you want to come to our website, it's clear.tax, C-L-E-E-R.tax.

17:34And we'll help you get an extension filed and just buy you a little bit more time so you can completely understand what you need to do. And we're happy to answer any questions you have. We'll try and keep you out of trouble as best we can. Fire Nation, you're the average of the five people you spend the most time with. You've been hanging out with DM and JLD today, so let's keep up that heat. And for links to everything we talked about, visit eofire.com. Type David in the search bar. The show notes page will pop right up. And David, one more time, what is that call to action? Just visit our website, clear.tax, C-L-E-E-R.tax, And let's get you an extension for the April deadline.

18:13David, thank you for sharing your truth, your knowledge, your value with Fire Nation. For that, we salute you and we'll catch you on the flip side. Awesome. Thank you, John. Hey, Fire Nation, a huge thank you to our sponsors and David for sponsoring today's episode. And Fire Nation, are you ready to rock your very own podcast? Check out our free podcasting course where I will teach you how to create and launch your podcast for free, freepodcastcourse.com. I'll catch you there or I'll catch you on the flip side.

19:07Thank you.