We used a foreign contractor to carry out work in that foreign country. we entered this under contract labor, but where do we specify that the contractor is foreign?

The answer to this question may surprise you somewhat; but in truth you don't need to identify anywhere on your wife's consulting business tax return (assuming she is a Schedule C, self-employed, filer) that her contractor was either foreign or domestic, or that the contracted work was performed either inside or outside of the borders of the United States.

In other words, for US tax purposes, it does not matter that your wife hired a Russian contractor to undertake work in Russia.  The cost of the work still gets reported (i.e., as contract labor) and deducted as a valid business expense just the same way, either foreign or domestic.

If you wish, you can draw IRS attention to the fact that the work was done overseas by entering the contracted labor cost as an "other" expense item, and then manually inputting a descriptive definition like "Russia, Contract Work" or similar.  However, there is no special line, or box, on your personal tax return specifically used (or required) to denote foreign business expenses.

Please keep in mind as well that this answer only applies to United States tax law.  There may very well certain taxes due, or other tax compliance forms required, in Russia, to report the hired labor.  However, that is beyond the scope and purview of this answer.  You are respectfully encouraged, therefore, to research that information for yourself, or to confer with a professional or credentialed authority with country-specific knowledge in this area.

Thank you for asking about this important issue.