Schedule C Earned Income - Excluded as Foreign Earned Income?

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.

  1. I do pay local and federal taxes here in Japan.
  2. 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.

Sincerely,

Albert Kennis

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Reply to
akennis
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One point you didn't cover is your US state of residence, presumably the one in which you formed the LLC. They will certainly want state income tax, if that state has one. ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

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. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

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