Self-Employed Losses Allocable to Excluded Income 2555

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
whiterhino
Posts: 17
Joined: Sun Feb 18, 2018 3:53 pm

Self-Employed Losses Allocable to Excluded Income 2555

Post by whiterhino » Sun Mar 18, 2018 8:28 pm

I am trying to make sense of line 44 on form 2555:

"Enter on line 44 the total amount of those deductions (such as the deduction for moving expenses, the deductible part of self-employment tax, and the expenses claimed on Schedule C or C-EZ (Form 1040)) that aren't allowed because they are allocable to the excluded income. This applies only to deductions definitely related to the excluded earned income."

https://www.irs.gov/instructions/i2555# ... 8672710336

Let's say I have income from foreign employment and income from foreign self-employment, both of which gets excluded on form 2555.

Foreign employment income: $50000
Gross foreign self-employment income: $5000
Self-employment deductions: $6000
Net self-employment income: -$1000

In the above example, the self-employed losses are allocable to income that was already excluded, so I can never realize the loss, forwards or backwards. In this case, there is really no point to itemize all my business deductions since I can just exclude the gross amount ($5000) without exceeding the FEIE limit ($55000 < $100800). This would save me some time, since I could just file Schedule C-EZ and put $0 for expenses. Would I lose out on anything by taking this election?

Now suppose I have the situation above, except that I have net self-employment income of $1000 (deductions of $4000). Since I have a gain on my Schedule C my 1040 shows $51000 total income all of which is excluded foreign earned income, but only $50000 is excluded on form 2555 due to line 44. So I end up with $1000 of income. What the heck am I doing wrong?

Post Reply