Self-Employed Losses Allocable to Excluded Income 2555

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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." ... 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?

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