Schedule C and foreign income

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in_reality
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Schedule C and foreign income

Post by in_reality »

In the following Schedule C example, how do I take the foreign tax credit.

There is $150,000 in foreign income and $50,000 in expenses. After excluding income per the FEIE (and expenses on that income), there is $32,546 taxable to the US.

Line Description Amount
1 Gross Receipts 150,000
7 Gross Income Before Foreign Earned Income Exclusion 150,000
7 Less Foreign Earned Income Exclusion -101,300
7 Gross Income After Foreign Earned Income Exclusion 48,700
28 Total Expenses Before Reduction for Reg. § 1.911-6(a) Disallowance -50,000
28 Add Back Expenses That Are Not Deductible 33,765
28 Total Expenses After Reduction for Reg. § 1.911-6(a) Disallowance -16,235
31 Net Profit 32,465

How much foreign income can I claim on form 1116?

A) $32,465 (net profit) [It seems low since I actually paid foreign taxes on $100k of income]
B) $48,700 (gross profit) [this is the amount of foreign income I haven't excluded under the FEIE]
C) Something else?

I am thinking B.
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vinnydabody
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Re: Schedule C and foreign income

Post by vinnydabody »

Pretty sure it's A but you have to reduce the foreign taxes available for credit per Treas Reg. 1.911-6(c).

The formula is Foreign Taxes Paid X (the Excluded Foreign Earned Income + Foreign Housing Deduction Amount - the disallowed expenses that would otherwise be deductible and are definitely related to and allocable to the excluded amounts) / (the total foreign earned income – the deductible expenses definitely related to the foreign earned income).

The reduction in foreign taxes is shown on Form 1116, Line 12.
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