Re: LLC taxation as a partnership

Posted by Katie on June 21, 2007, 5:44 pm

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> Katie wrote:

>>> Would a "foreign earned income" exclusion via form 2555

>>> apply to me? In a recent thread ("Schedule C Earned Income -

>>> Excluded as Foreign Earned Income"), the general consensus

>>> was that the OP (american citizen living in Japan and

>>> running his Delaware-based LLC from over there) would be

>>> entitled to a federal tax break.

>>>

>>> Would the same apply to a non-US citizen living abroad and

>>> partnering in a US LLC?

>> No, the IRC Sec. 911 exclusion would not apply to you for at

>> least two reasons: (1) it is available only to U.S.

>> citizens or residents; and (2) your income from this

>> activity would not be "foreign earned income" since it would

>> be earned in the U.S.

>> In the previous thread, the OP was working for his LLC in

>> Japan, so his income was earned in a foreign country.

> One small clarification please : I am clear with reason (1)

> above, but if I am going to be doing work for the LLC from

> Europe, I do not see why item (2) above would apply. The

> previous poster was living in Japan but working for a US

> LLC. I guess I am trying to clarify whether "foreign earned"

> denotes the geographical location of the earner rather than

> the geographical source of the income.

> BTW, what is the title of the IRS publication you are citing

> above? Thanks again,

You are correct that "foreign earned" refers to the location
of the earner. However, your distributive share of income
from this LLC would not be "foreign earned" income for
purposes of Sec. 911, since it arises from your ownership of
an interest in the LLC, not from your personal services.

You could receive a guaranteed payment commensurate with the
value of the services you provide for the LLC. That amount
would be paid to you and subtracted from the LLC's income in
arriving at the members' distributive shares. Your
guaranteed payment would be eligible for the 911 exclusion;
your distributive share of the remaining income would not.
See Sec. 911(d)(2) and Carey v U.S. (1970) 25 AFTR2d 70-1395
, 192 Ct Cl 536 , 427 F2d 763 , 70-1 USTC. =B69455.

I did not cite any IRS publication. I cited the Internal
Revenue Code, Sec. 911 - specifically, Sec. 911(b)(1)(A),
which defines "foreign earned income," and Sec. 911(d)(1),
which defines a qualified individual.

Since you are not a citizen or resident of the U.S., you
would not meet the definition of a qualified individual. As
a result the definition of "foreign earned income" is
academic, because you would not qualify for the exclusion.

Katie in San Diego

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