Contact UsCan I use the Foreign Earned Income Exclusion on Internet-based digital product sales?
I am moving out of the U.S. and would like to use the Foreign Earned Income Exclusion (FEIE). Here are my specifics:
1. I produce and sell digital information products over the Internet, to people in numerous countries. However, 90% of those sales are currently to Americans living in the U.S.
2. Question: Though I will live in a foreign land, would Internet-based sales to Americans in the U.S. qualify for the FEIE? I'm confused by the language in an IRS document: "The source of salary, wages, commissions, and other personal service income is the place where you perform the services." Well, the place would be from the foreign country, on my computer, creating the products and the offers. However, later in the same document, "The foreign earned income exclusion and the foreign housing exclusion or deduction are limited to earned income from sources within foreign countries." It doesn't exactly contradict the first quote, but may not support it, either. How do you interpret this?
3. I wish my wife to also exercise her FEIE and to draw income from the same work I do. Question: Can I hire her and pay her a salary? If she is my salesperson, does the IRS limit how much I can pay her?
Thank you.
1. I produce and sell digital information products over the Internet, to people in numerous countries. However, 90% of those sales are currently to Americans living in the U.S.
2. Question: Though I will live in a foreign land, would Internet-based sales to Americans in the U.S. qualify for the FEIE? I'm confused by the language in an IRS document: "The source of salary, wages, commissions, and other personal service income is the place where you perform the services." Well, the place would be from the foreign country, on my computer, creating the products and the offers. However, later in the same document, "The foreign earned income exclusion and the foreign housing exclusion or deduction are limited to earned income from sources within foreign countries." It doesn't exactly contradict the first quote, but may not support it, either. How do you interpret this?
3. I wish my wife to also exercise her FEIE and to draw income from the same work I do. Question: Can I hire her and pay her a salary? If she is my salesperson, does the IRS limit how much I can pay her?
Thank you.
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Tax Professional Answers
John Stancil
This is an evolving issue. With the digital revolution, many assumptions built into tax definitions have been rendered antiquated, or obsolete, but are still on the books. My answer is not definitive, but, based on my research it appears the the current thinking is that the income is eligible for the exclusion. Since you are in a foreign country and making the sale there, it appears there is no effectively connected US Source income.
You may pay your wife a salary, but you need to be certain that she is paid a reasonable salary for the work performed. You should be able to demonstrate what work she performed for the company. The only limitation is reasonableness. Hope this helps.
John Stancil, CPA
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525 weeks ago
You may pay your wife a salary, but you need to be certain that she is paid a reasonable salary for the work performed. You should be able to demonstrate what work she performed for the company. The only limitation is reasonableness. Hope this helps.
John Stancil, CPA
Question Owner
Thank you for your answer. We'll likely set up a foreign-based corporation, with both of us leading separate projects and being paid as project managers. I think that will be a cleaner approach.
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525 weeks ago