# NOL on FEIE



## tallrob (Jan 4, 2017)

I have a question that I thought would be a simple but I can't find a concrete answer anywhere.

I'm starting the IRS Streamlined Offshore Procedure. I'm a self-employed American living full-time in Switzerland for seven years, and earn far below the FEIE threshold. So I have zero tax liability. In fact, I ran my figures through some tax software and it generates an NOL from Form 2555. Basically whatever income I earn in Switzerland is a loss on my 1040.

I have a friend who is in a similar situation, but he's not self-employed. Last year he had six years of returns prepared by H&R Block while he was in the US, and had similar results. Furthermore, they carried his NOL forward and by the 6th return he had accumulated an NOL of $200k. 

So my question: Is this right? It doesn't make much sense to me, but I suppose a loss is a loss, an can be carried forward. And I can't find anything specific that says otherwise. So far a Google search has led to several "can't be" results but nothing in the tax code that spells it out. And H&R Block says it works.

Can anyone shed some light on this? Much appreciated!

-Rob


----------



## Bevdeforges (Nov 16, 2007)

I don't think you can generate an NOL from the FEIE. The idea is supposed to be that you calculate the maximum FEIE based on your "qualifying period" in the current year and the maximum allowable in that year. You then use the smaller of your maximum allowable or your foreign earned income for the year (basically the number you've reported on line 7 of the 1040) to subtract from your income on page 1 of the 1040. That should eliminate the amount on line 7 but not bring you down to less than 0.

If your friend filed his returns showing a NOL coming from the 2555, it may just be that the IRS doesn't really bother "correcting" returns with errors like that if it doesn't make any difference in the amount due (which is probably $0). Where he'll find out how legit the NOL is won't be until he has income that has been subject to withholding or estimated payments and tries to take the accumulated NOL against current income in order to get a refund or to lower taxes due on income that isn't excludable. That's when the IRS may step in to question the approach.
Cheers,
Bev


----------



## tallrob (Jan 4, 2017)

Bev,

When I look at his returns (he was kind enough to lend me a copy), 1040 Line 7 is blank, which means his H&R Block preparer didn't enter his foreign income there, only on the 2555. So I did the same. Is that incorrect? Should foreign income also be included in Line 7? If so, then it would zero out Line 22 and that would solve the mystery (and my friend should call his preparer).


----------



## tallrob (Jan 4, 2017)

... I'm assuming it wasn't entered on Line 7 because he technically doesn't have any W-2s

-Rob


----------



## Bevdeforges (Nov 16, 2007)

That's a mistake. You're supposed to fill in your salary income (or salary-like income) on line 7. It doesn't matter if you have W-2's (which you won't if you're overseas).

Take a look at IRS Pub 54 and the examples in there will show you that you put your foreign salary income on line 7 and then subtract it on line 20 or whatever line it is that the 2555 tells you to take your FEIE.

The H&R Block folks in the US aren't given much training in how to do filings for overseas residents.
Cheers,
Bev


----------



## tallrob (Jan 4, 2017)

All clear. Thanks!


----------

