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Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 2853
Experience:  18+ years of experience in tax preparation; 25+ years of experience as a real estate/corporate paralegal.
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I am looking tax professional who is familiar with the

Customer Question

I am looking for a tax professional who is familiar with the foreign earned income exclusion.
I own 2 USA LLC's (that file federal taxes as S corps) and live out of the USA 330+ days a year in 2 different countries. The USA LLC's have employees in the USA (and some who work out of the USA). And I receive my wages as W2 with my place of work listed as out of the USA, but official "workplace" as FL.
I have been listing my tax home as country A where I live and just want to double check that there are no issues because I am not in country A for the entire year. E.g. I am there about 3-4 months and another country for about 3.
When I read the tax guidelines, it says, if you are an intermitent (e.g. no tax home), your tax home is where you work and I mostly work in country A.
What issues can there be with this and is it OK to be filing the FEIE exclusion?
Submitted: 5 months ago.
Category: Tax
Expert:  Barbara replied 5 months ago.

Welcome to Just Answer. My name is ***** ***** I will be happy to assist you.

Generally the FEIE is available for US citizens who live and work abroad, so first you need to be a US citizen or resident alien and you need to meet the qualifications for the exclusion meaning you have to be

  • A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
  • A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

Next the income from the LLC has to be foreign earned income, earned by you as an individual. If the LLC is a disregarded entity, and the income qualifies as foreign earned income, then the exclusion would apply. Some type of personal service income through the LLC is going to be about the only type of income you can have through a US LLC that would qualify.

If the LLC is taxed as any other type of entity (in your case, S corporation) or the income is from the sale of tangible or digital goods delivered in the US, then you would not have foreign earned income, but most likely either unearned income or US sourced income, which would not qualify for the exclusion.

https://www.quora.com/If-I-own-an-LLC-registered-in-the-United-States-but-I-live-abroad-am-I-able-to-arrange-contracts-with-a-company-based-in-another-country-for-production-design-work-Can-I-file-the-income-earned-under-the-Foreign-Earned-Income-Exclusion

https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion

Please let me know if I can assist you further.

Thank you and best regards,

Barb

Customer: replied 5 months ago.

Thank you.

With regards ***** ***** income, it is services income from the S Corp. I am paid via W2 by the S Corps I own

The question was that if I am not a bona fide resident of a foreign country (since I am in 2 foreign countries), do I still qualify to apply the FEIE?

Thanks.

Expert:  Barbara replied 5 months ago.

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:

  • A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
  • A U.S. citizen or a U.S. resident alien who is physically present in a foreign COUNTRY or COUNTRIES for at least 330 full days during any period of 12 consecutive months.

To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad.

The issue for you is that if the LLC is taxed as any other type of entity (in your case, S corporation) or the income is from the sale of tangible or digital goods delivered in the US, then you would not have foreign earned income, but most likely either unearned income or US sourced income, which would not qualify for the exclusion.

Make sense?

Customer: replied 5 months ago.

Thanks Brabara,

Two points to clarify:

1) The IRS website states tax home being in a foreign country. However, if I live in 2 countries about 183 days in one and 180 in the other, do I have a tax home or not? What would it be?

2) The LLC taxed as a S Corp pays me via W2. The FEIE would apply to these earned income, right?

Thanks

Customer: replied 5 months ago.

E.g. the business sells services, but my income is received via W2 while I am out of the USA.

Expert:  Barbara replied 5 months ago.

As I previously mentioned,

One of the IRS requirements is that A U.S. citizen or a U.S. resident alien who is physically present in a foreign COUNTRY or COUNTRIES for at least 330 full days during any period of 12 consecutive months. You meet this requirement.

However,

Next the income from the LLC has to be foreign earned income, earned by you as an individual. If the LLC is a disregarded entity, and the income qualifies as foreign earned income, then the exclusion would apply. Some type of personal service income through the LLC is going to be about the only type of income you can have through a US LLC that would qualify.

If the LLC is taxed as any other type of entity (in your case, S corporation) or the income is from the sale of tangible or digital goods delivered in the US, then you would not have foreign earned income, but most likely either unearned income or US sourced income, which would not qualify for the exclusion. You do not meet this requirement.

Make sense?

Customer: replied 4 months ago.

On the first point, the question is what is my tax home based on the info I've shared?

With regards ***** ***** foreign earned income, the LLC is taxed as a S Corp for income from services. Then the LLC pays me via W2 and I am residing out of the USA. The income I receive would be foreign earned as I am doing my work out of the USA, correct? This scenario isn't that different than an employee of another company, just that the distribution income wouldn't be earned income.

Expert:  Barbara replied 4 months ago.

Your tax home is the foreign country or countries that you are present in for at least 330 days during any period of 12 consecutive months.

Because your LLC is taxed as an S corporation, the income paid to you is not foreign earned income.

Customer: replied 4 months ago.

I'm reading this article:

http://www.accountantforums.com/threads/foreign-earned-income-exclusion-for-an-s-corp.15678/

And it states a contrary opinion to what you wrote, that the income I receive for W2 qualifies and I file 2555 forrm.

Regarding the tax home, that can be more than one foreign country?

Expert:  Barbara replied 4 months ago.

In the article you reference, a U.S. company is paying the S corporation. In your case, you own the S corporation and are paying yourself.

As to the tax home question, yes.

Customer: replied 4 months ago.

https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-what-is-foreign-earned-income

States that wages are valid foreign earned income as long as I am living in the foreign country.

Where on the IRS site does it state that if I own a S corp and the S corp pays me wages that the wages do not qualify for the FEIE?

Expert:  Barbara replied 4 months ago.

The income has to be earned by you as an individual. Your LLC taxed as an S corporation is earning the income and then paying you. If your LLC was taxed as a sole proprietorship, the income would qualify for FEIE.

https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-what-is-foreign-earned-income

Customer: replied 4 months ago.

The W2 salary is earned by me.

What you are writing doesn't make sense. If the income was LLC income then the FEIE would be reduced by the expenses to negate it.

Expert:  Barbara replied 4 months ago.

The W-2 salary is earned by you which is paid by your LLC which earns the income and is taxed as a U.S. S corporation and of which you are a shareholder.

As to the LLC, you would be able to exclude the net as foreign earned income.

Customer: replied 4 months ago.

That doesn't make sense either. The FEIE is only for individuals.

Where on the IRS site or opinion letter does it support what you wrote?

Expert:  Barbara replied 4 months ago.

I understand the FEIE is available only to individuals.

Upon further research, your salary (or other earned income) is excludible if you meet the foreign residency requirement of IRC Section 911 and if you earned that income by working in another country/countries.
The income that cannot be excluded using the FEIE is the pass-through income reported to you on the K-1 issued to you by your S corporation.

I apologize for any confusion.