In short I live and work overseas. For the past few years I've passed one of either the tests to qualify for the FEI exemption. During this time I've also been doing some web design work for US clients, and have created a small part time business reporting that income on a Schedule C. I've been funnelling that income directly into student loans and so it doesn't even leave the US.

This year I'd like to explore taking a home office deduction as by all indications I seem to qualify - a dedicated space in my home, a computer that is used wholly for that work etc. I cant find any discussion or guidance stating that the home office must be in the US. Am I pushing my luck here?

Thanks a lot for your thoughts.

  • actually just because your business is conducted in US$, and you do not take the money offshore with you, that does not mean you can't take the Foreign Earned Income Exclusion on it. The test of having foreign earned income is based on where you perform your services, not based on where you got payment from. This self employed income is foreign earned income since you do the work offshore. You can claim the Exclusion against this income.
    – user29592
    Jun 12 '15 at 2:28

You are pushing your luck, but not because you're not in the US, because it is likely that you're not qualified. From what you said, I doubt you can take it (I'm not a professional though, get a professional opinion).

You say "dedicated space". It has to be an exclusive room. You cannot deduct 10 sq. ft. from your living room because your computer that is used wholly for your business is there. It has to be a room that is used exclusively for your business, and for your business only. I.e.: nothing not related to the business is there, and when you're there the only thing you do is working on your business.

Your office doesn't have to be in the US necessarily, to the best of my knowledge. Your office must be in your home. If you take primary residence exclusion as part of your FEI, then I doubt you can deduct as well.

  • Thanks for the input, but Im not sure the documentation I've read supports all of your statement re. an exclusive room. "Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities." irs.gov/Businesses/Small-Businesses-&-Self-Employed/….
    – orionrush
    Feb 23 '13 at 23:49
  • you've lost me as well re primary residence exclusion - isn't that to do with the sale of a home? I rent and have never owned - looking forward to changing that however!
    – orionrush
    Feb 24 '13 at 0:03
  • @orionrush re the exclusivity - this deduction is a huge red flag for the IRS. the exclusivity is the only way to pass an audit. It has been abused so much, that unless you can prove beyond any reasonable doubt that the area is used only for business - it will be disallowed. Part of the room cannot be used exclusively if another part is not - common sense. Re the exclusion - see form 2555 part VI. If you fill that, I doubt you can also claim a home office deduction, because you'd be deducting the same twice. Part VI is much better as it doesn't have to be a business use.
    – littleadv
    Feb 24 '13 at 0:28
  • You're right about housing exclusion, its a better route for those who make close to 90,000+, but we're under this threshold so no benefit. Also the buisnes earns UDS so is not subject to FEI exclusion, a home office deduction would help with the self employment tax. I hear you re. exclusivity and abuse. The room is used as a shared office with my wife - no other use. I'm only claiming for the square footage for my half of the room and being conservative there. + my work is art/design/media and my activities in the room fall into those categories. Your pts have been very helpful thanks
    – orionrush
    Feb 24 '13 at 11:14

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