Can a loss from foreign self employment be excluded from taxable income by entering the loss on form 2555 foreign earned income exclusion?

[big toes]

Can the foreign earned income exclusion be a negative amount?

If gross income (sch C line 7) after subtracting cost of goods sold (sch C line 5) from gross receipts (sch C line 1), is a negative number, or if expenses exceed gross income, so that the net business profit (sch C, line 31) from self employment abroad is a loss, some software will not allow either Form 2555 line 42 (foreign earned income exclusion) nor line 45 (to be copied to Schedule 1 line 8d) to be a negative number and will instead enter a zero.

This is when either entering a negative number for income for personal services (2555, line 20), or when the business expense entered as a deduction (2555, line 44) exceeds line 20.

The problem is that a net loss on Schedule C offset other income on 1040. However, once electing to exclude foreign earned income in a past year, all subsequent foreign earned income must be excluded. If form 2555 line 45 is zero, then none of the loss has been excluded.

[Anonymous_]

Stay tuned as I page Champ @pk.

[pk]

@big toes , I am not quite sure  of the situation here.  So I will state  what I understand  as the scenario--

(a) you , a US person ( citizen / Green Card ) , living abroad and having self-employment  foreign income yhat is generally eligible for  Foreign Earned Income exclusion.  You have taken advantage of this  FEI Exclusion in the past to reduce double taxation effects.

(b) in 2022  you have loss --- under US tax laws ( ?? ) and  under foreign  laws (??? ).

So now the questions is  , and absent any other foreign active income, how do you  recognize the  business loss for US tax purposes ?  Does this describe the situation or am I missing the picture ? 

 I ask this because , if the purpose  for Foreign Earned Income Exclusion is to avoid double taxation i.e. exclude i INCOME from US taxes , by having a loss you have already excluded the income from US taxes and furthermore  you are able to carry the business loss  back  three years and forward till extinguished.  You should have achieved the purpose -- to avoid double taxation.   But may be this is not the picture -- please tell me more  as to what you are trying to achieve and also if any of my assumptions are wrong  and of course  which country are you talking about -- ( your tax home ).

I will circle back once I hear from you

pk

[big toes]

@pk 

Assuming (a) and (b) are true, however, the loss I am referring to is a net business loss, when business expenses (e.g. $15,000) exceeded business gross income (e.g. $10,000), which is reported on 1040 Schedule C line 31 as a negative number (e.g. -$5,000), and copied to 1040 Schedule 1, line 3. There are other income such as interest, dividends, and capital gains, which the loss from business could be fully netted against.

The net business loss comes from self-employment work abroad, and the taxpayer qualifies under either of the bona fide residence or physical presence test for foreign earned income exclusion.

A past election to exclude foreign earned income (gross business income) in a previous year requires that they also be excluded in subsequent years, unless the election is revoked.

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Section 911(e)(1) Election:

An election under subsection (a) shall apply to the taxable year for which made and to all subsequent taxable years unless revoked under paragraph (2).

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1040 Schedule 1, line 3, shows a negative -$5,000 business loss, which is a result of deductions (the business expenses) allocated to excluded gross income (the business gross income), and not allowed against other gross income (interest, dividends, capital gains).

Therefore, 1040 Schedule 1, line 8d, which is copied from 2555, line 45,  needs to be an equal value of -$5,000 in parenthesis (double negative) to net against the amount on 1040 Schedule 1, line 3.

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Section 911(d)(6) Denial of double benefits:

No deduction or exclusion from gross income under this subtitle or credit against the tax imposed by this chapter (including any credit or deduction for the amount of taxes paid or accrued to a foreign country or possession of the United States) shall be allowed to the extent such deduction, exclusion, or credit is properly allocable to or chargeable against amounts excluded from gross income under subsection (a).

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Taxpayer enters $10,000 of gross business income (foreign earned income required to be excluded due to past election) on 2555, line 20a, and the value is carried down to line 43.

Taxpayer enters $15,000 of business expenses (the deductions allocated to excluded income) on 2555, line 44.

Line 45 is the result of line 44 subtracted from line 43 ($10,000 - $15,000), which should be -$5,000. However, the tax preparation software enters $0. When attempting to override the value, a warning message says that the value should be a positive number.

And so that is the problem.

[pk]

@big toes , are you the taxpayer or are you asking questions on behalf of somebody else-- if so whom ?   Which country is the person doing business in ?  Is he/she a citizen of that country or is he/she a citizen/ GreenCard  of USA ? Or is this a class question ?

I generally disagree with tax treatment as  you have presented --- some are interpretation issues while others  do not apply in this case .

I cannot do anymore tonight -- will be back tomorrow and after I get your answers.

[big toes]

@pk Thanks for the reply. I could be the taxpayer. The business activity from self-employment is performed in a foreign country which is not located in the US or US territories. The taxpayer is a US citizen. The taxpayer is a tax resident of a foreign country, the tax home is in the foreign country, and is subject to foreign income tax there.

If my understanding of the tax treatment is not correct, then where should the taxpayer report on their tax return, the foreign earned income (the gross business income), and the business deductions (the business expenses), when the business deductions exceed the business gross income, and elected to exclude foreign earned income in prior years?