Foreign Earned Income Exclusion and NOLs

[jofijohnjoseph]

Just wanted to confirm that, if a taxpayer is taking the Foreign Earned Income Exclusion and all of her income is zeroed out by the exclusion, can she then claim the Net Operating Loss created after the Standard Deduction is factored in for carryforward to future years?

In other words, she made $60,000 of income, all of which was zeroed out by the Foreign Exclusion. Her final income after the Standard Deduction is ($12,200).  Does she have a $12,200 NOL for future years now?

[itonewbie]

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@jofijohnjoseph wrote:

...a taxpayer is taking the Foreign Earned Income Exclusion and all of her income is zeroed out by the exclusion...

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I think you answered your own question.

If your client has other foreign or US source taxable income, you may then need to watch out for SSL/OFL that would be subject to recapture.

[George4Tacks]

i.e.
No
No

[jofijohnjoseph]

Sorry if I am being dense here, but can the taxpayer take a NOL here or not? 

She does not have any other income period beyond the self employment income that is entirely covered by the Foreign Earned Income Exclusion.

[itonewbie]

No.  How do you determine that your client has an NOL based on the numbers you presented?

See also this thread that briefly discusses common misconceptions about self-employment status in foreign countries: https://proconnect.intuit.com/community/proseries-discussions/discussion/i-have-a-self-employed-clie...

[sjrcpa]

Negative taxable income does not equal NOL.

[TaxGuyBill · Accepted solution]

Just a bit of explanation, look at the worksheet in Publication 536:

https://www.irs.gov/pub/irs-pdf/p536.pdf

Line 1 does start as negative (a potential NOL), but then the next few lines 'add back' non-business deductions, including the Standard Deduction (Line 6).  When you work through the numbers, the Standard Deduction does not affect income to create a NOL.

[mrscpa]

I'm also getting a NOL for foreign earned income (not self employed) exclusion, I wonder if this is related to the form 2555 issue error message. Is anyone else getting this error? It wants to carry forward the exclusion amount as a NOL for future years.

I called tech support and they couldn't figure it out either, it could be related for the form 2555 error message on another thread 

[DanaL]

I know that there should NOT be an NOL, but the ProSeries Professional software keeps creating one.  If Foreign wages are 18,620 on the 2555 which carries to Sch 1 other income. Adding the other income on Sch 1 makes this net zero which is correct. 

But, NOL Worksheet shows Line 1 is negative (18,650) which is the HOH std deduction

Line 6 adds it back, but then there is ALSO

Line 7 non business income of the 18,620 

Line 24 shows a NOL of -18,620.

What am I missing? Seems the exclusion should add back the 18620 somewhere between the line 7 and line 24.

[apg]

HI.

Did you get an answer on this?  What steps did you do to make sure the NOL doesn't carryover for next year tax filing?