# Called IRS and Joe said I have an ornery case!



## Jonnydutch (Mar 7, 2013)

Hello All:

Just got off the phone with Joe from the IRS helpline and after explaining my situation, he advised me to get some professional help just in time before he completely hung up on me. I have been perusing the forums and have not found a situation exactly like mine nor answers to my specific questions, so here goes...

I have been living in Buenos Aires for the past 5 years and in the last two started a business selling shoes and clothing world wide via physical store front and via an online store. 

My research leads me to believe that I am eligible for the foreign earned income exclusion but I have a doubt:

I receive all of my payments from clients via a merchant account linked to a bank account under my 'doing business as' based out of Texas. Meaning that these monies are 'profit' from my sole proprietorship. Does this mean they are or are not earned income?​
My second doubt is:

Would it be advantageous to file as married filling jointly with my Argentinean wife? She is a nonresident alien. She would have to have either a SSN or ITIN. Is there an economic difference between the two? Ie would she have to pay into Social Security every year or would she be allowed to deducted her contributions in the local 'social security.'​
Also:

How is the exclusion calculated? My rough gross sales is $150,000 and after costs (rental property here, an employee hired as an independent contractor and paid entirely in pesos, shipping costs, purchase of the products I sell, etc...) my profit is roughly half.
If I am allowed to deduct these expenses the exclusion ($95,100) would cover my income/profit. If it does not allow me to deduct the expenses then obviously I would be left with tax exposure​. 

And finally:

I purchased a home here last year and can figure out (after reading and rereading Pub. 54) if I am eligible and/or if is advantageous to declare the home deduction. 

Thank you for any assistance you may be able to provide,
Jonny


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## Bevdeforges (Nov 16, 2007)

OK, first thing to understand is that you can't hold the IRS to any "opinion" they give you by phone. Only if you request a determination letter will they stick to what they have said (probably because it's in writing), and those letters take a LONG time to get.

I have been living in Buenos Aires for the past 5 years and in the last two started a business selling shoes and clothing world wide via physical store front and via an online store.



> My research leads me to believe that I am eligible for the foreign earned income exclusion but I have a doubt:
> 
> I receive all of my payments from clients via a merchant account linked to a bank account under my 'doing business as' based out of Texas. Meaning that these monies are 'profit' from my sole proprietorship. Does this mean they are or are not earned income?


The determining factor is where you are physically doing the work for which you claim "earned income", not where your customers, lock box or banking arrangements are. On the surface it sounds as if you should be able to claim the FEIE. Pub 54 includes the following:


> Income from a sole proprietorship or partnership. Income from a business in which capital investment is an important part of producing the income may be unearned income. If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned income.
> 
> Capital a factor. If capital investment is an important part of producing income, no more than 30% of your share of the net profits of the business is earned income.


On the question of filing jointly with your wife, I doubt it will help you, though you can try. She doesn't pay US social security unless she is self-employed and NOT contributing to the local social insurance system where you are. But normally, it's not worth it to bring in an NRA spouse unless he or she has spent at least part of the year in the US (i.e. the year the NRA spouse arrives or departs the US).

We've had folks here claim that the FEIE has to be calculated against the gross revenue of the business, but I'm not at all sure of that. You could always file claiming the FEIE on your net income from the business and see what happens. But even if that's the case, you would apportion your expenses to apply against the part that is subject to the FEIE and those that aren't. (I.e. Assuming your expenses are half - then the "excess" above the FEIE amount would be reduced to half by the expenses applied against it.)

By home deduction, do you mean the housing exclusion? If so, read through the requirements quite literally and see what (if anything) you can claim. If you're talking about home mortgage deduction and that sort of thing, you can definitely claim that if you itemize your deductions - though again, you have to apportion the deductions between what's covered and what isn't for the FEIE.
Cheers,
Bev


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