Foreign Earned Income Exclusion - Wages and Business Income

[Telecommuter]

Hello,

I live in Europe developing software for for US companies as both employee and self-employed. My Tax Home is in France. In the past 5 years, I have used the FEIE in my US tax returns. This year however, my situation has changed leaving me a bit confused. Here is my situation:

- My W2 wages are $165,000.

- My gross self employed business income (Schedule C) is $4400.

- My net self employed income is a loss of $-4500.

- I was physically present in France for the entire 2021.

- The FEIE limit for tax year 2021 is $108,700.

- The Housing Exclusion yields Zero in Form 2555, line 36, so it is irrelevant.

- In Form 2555, line 19 (total wages), I entered $165,000.

Here is my question: Considering that my wages exceed the FEIE limit, do I have to still enter my gross self-employed income on Form 2555, line 20a (Allowable share of income for personal services in a business)?

The IRS site says, "A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income."

I have emphasized the word "may claim". It sounds to me that it is optional since I have already reported my self-employed income in Schedule C.

The reason I ask this question: If I do enter a number in Form 2555, line 20a ($4400), then on line 44 (Deductions allowed in figuring adjusted income allocable to excluded income), I would have to enter my business expenses ($8900 or a factor of $8900).

Lastly, on line 45, $8900 is subtracted from $108,700, meaning that I could not use the full $108,700 exclusion despite my wages being $165,000.

I am worried that if I do not list my business income in Form 2555, then it would be considered "revoked", and as a result in the following years, I would not be able to list my business income in Form 2555.

Any advice would be appreciated.

[LeonardS]

Yes, you report your self-employment while living overseas on Schedule C as you have done.  You do not have any income, net profit, from Schedule C so there is no income to report on Form 2555.  If you had a net profit from Schedule C you would report it on Form 2555 as it was earned overseas.  You have correctly reported your self-employment on Schedule C and have not omitted anything to cause you to be "revoked"

[Telecommuter]

Thank you for your response. I am still a bit confused though because in Form 2555 instructions it says, "If capital is not an income-producing factor and personal services produced the business income, the 30% rule does not apply. Your entire gross income is earned income."

Though my net business income was a loss, but my gross income was more than $4000. Does that make any difference as related to entering the gross income in Form 2555, line 20a?

[DaveF1006]

No this will not make a difference since you experience a loss. Do not file 2555 since you are not excluding S/E income on your return.

@Telecommuter