> I'm trying to confirm my understanding that income earned
>> while living abroad as a sole proprietor (of a US LLC) can
>> be excluded via form 2555 as foreign earned income.
>>
>> Here are the important details of my arrangement:
>>
>> 1. US LLC creating and selling software products and
>> services.
>> 2. Sole owner of said LLC - living and working abroad as a
>> bona fide resident of Japan.
>>
>> Let's say that the business has a net profit for the year as
>> computed on Schedule C. This income then gets added into my
>> personal income calculation on Form 1040 - line 12. We then
>> include this same amount on Form 2555 - line 20a as our
>> foreign earned income, "Allowable share of income for
>> personal services performed... in a business or profession."
>> Further down in section IV of Form 2555 we then compute our
>> foreign earned income exclusion, and enter this back into
>> Form 1040 - line 21 as a negative value concluding the
>> exclusion.
>>
>> The verbiage given in the instructions for Form 2555 is
>> minimal with regards to its line 20. My understanding of
>> the whole exclusion is that so long as the work is actually
>> done abroad, regardless of the company it is done for and
>> other remuneration details, the resulting earned income can
>> be excluded. In this understanding, earned income from the
>> business you're running while abroad is no different.
>> Right?
>>
>> As a note, because I know the questions will come up:
>>
>> 1. I am a US citizen.
>> 2. I do pay local and federal taxes here in Japan.
>> 3. I have chosen to establish my business as a US domestic
>> LLC because I intend on moving back to the US in the future.
>>
>> Any advice would be greatly appreciated.
> Your basic understanding is not quite correct.
>
> You are right that the income is excludable under the
> circumstances described. You would use line 20 of Form 2555
> to report the income -- line a for a single-member LLC, line
> b for your share of a multi-member LLC.
>
> On Form 2555 the amout shown on line 20 a is the "Gross",
> not the net income from the business. Then, after you
> calculate how much of this is excludable, you go to line 44.
> There, you enter a percentage of the deductions claimed on
> Schedule C. The actual exclusion is the net of these two
> amounts -- plus any housing exclusion you may have.
>
> This may or may not give you a different result but it is
> the correct way to do the calculation.
Hello and thanks,
Yes, line 44 is required in order to reduce your gross to net for exclusion purposes. This line was actually a little confusing to me at first, but now more or less makes sense. Do you know of any publications dealing with these such circumstances? Greatly appreciated!
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