@kruthika , agreeing with my colleague @DaveF1006 , about whether to use Gross Foreign income or net income. I would however like to add a bit here.
(a) Self-employment income is generally reported on Schedule C.
(b) The reason one must start with the Gross income for foreign source income is because the only certain amount is the Gross Income. Thereafter
1. The deductions allowable varies according to each country's own laws/statutes/regulations etc.
2. The general principle is that for avoidance of double taxation, the income that is doubly taxed really is the lesser of taxable income under US laws and that under the Foreign Taxing authorities rules.
Also please note that
(A) generally Physical Presence Test is preferred because Bona-fide residence needs IRS approval. This is especially true because you both are requesting IRS to treat your NRA husband to be treated as a resident for tax purposes.
(B) once IRS approves the Tax Residency status for your spouse, it continues till revoked. And once revoked cannot be re-instated.
(C) Tax residency has no influence on USCIS decisions ( if ).
Hope this explains why one starts with the gross income and not net income of a business / self-employment.
