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I am traveling out of the country (US citizen) for a year and was made aware of the IRS's Foreign Earned Income Exclusion.

I own an online business that sells digital publications and makes around 50k a year. Pretty much everything is done automatically via the server. I would say I do about 5 hours of work on the site a week with customer support etc.

My question is would I still be able to use this exemption? I was told that only services based businesses could use this exemption.

Thanks!

  • How do you report this income on your tax return? – littleadv Dec 15 '15 at 9:35
  • @littleadv tax is reported as personal income (I think that is the term?) it's an single owned LLC so I just pay it like a sole-propreiter. Though I have been considering changing it to an S Corp. – Wisco84 Dec 18 '15 at 23:31
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Even though you will meet the physical presence test, you cannot claim the FEIE because your tax home will remain the US. From the IRS:

Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Having a "tax home" in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes.
...
You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. However, your abode is not necessarily in the United States while you are temporarily in the United States. Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling.
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The location of your tax home often depends on whether your assignment is temporary or indefinite. If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away from home expenses (for travel, meals, and lodging) but you would not qualify for the foreign earned income exclusion. If your new work assignment is for an indefinite period, your new place of employment becomes your tax home, and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion.
If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. If you expect it to last for more than 1 year, it is indefinite.
If you expect your employment to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes. For guidance on how to determine your tax home refer to Revenue Ruling 93-86.

Your main place of business is in the US and this will not change, because your business isn't relocating. If you are intending to work remotely while you are abroad, you should get educated on the relevant laws on where you are going. Most countries don't take kindly to unauthorized work being performed by foreign visitors. And yes, even though you aren't generating income or involving anyone in their country, the authorities still well may disapprove of your working.

My answer to a very similar question on Expatriates.

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As the name says, its for income earned in a Foreign country. If you have been paying US income tax on this while living in the US, nothing is going to change here. You should be informing yourself on how to avoid double taxation in your new country of residence. Passive income earned abroad (dividends, interest) also do not fall under this exemption.

The purpose of the Foreign Earned Income Exclusion is to make it easy for expats who work abroad to avoid double income taxation without going through the complicated process of applying for tax credits. The US is the only industrial country that taxes its residents regardless of where they reside. That is also why it only goes to about $100,000 a year. If you are a high earner, they want to make it more difficult.

Also as a side note, since you are going to be abroad for a year. I will point out that if you have more than $10,000 in foreign accounts at any point in the year you need to declare this in an FBAR form. This is not advertised as well as it should be and carries ridiculous penalties for non-compliance. I can't count the number of times I have heard a US expat say that they were unaware of this.

  • No, you're plain wrong. Tax ID has nothing to do with income sourcing. – littleadv Dec 16 '15 at 6:41
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Fear tactics posted above, likely by IRS agents. Yes, you qualify based on the residence test. You perform your work outside the US. You gather business data in a foreign country. The income is excluded.

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