Foreign Loss

[Snaggletooth]

One of my customers is a native of Kashmir. He has done well in the U.S. and deservingly so, having achieved a double doctorate in Electrical Engineering and Computer Science. He owns a Subchapter S corp with $20MM in Revenue.

He also has started a small company in Kashmir. Some 6-7 personnel comprised mostly of his friends and acquaintenances. Annual losses are between $25,000 and $30,000.
There are no foreign taxes. Not even a local privelege tax. Kashmir government is so happy to be getting Yankee money they are not going to tax him.

He believes he can deduct this loss on his US return. I don't think so. Everything I've read seems to indicate he must include his foreign income if a profit, and then take a credit for foreign taxes paid.

To additionally sweeten the pie, all of the revenue of his Kashmir company comes from his domestic SubS corp. I don't know whether this makes a difference or not.

[veritas]

Tax treaty with India or Pakistan?

I don't know which but if there is a treaty would it give some direction?

[Snaggletooth]

Tax Book

Bees, is there anything in THE TAX BOOK which would address whether a foreign loss could be deducted or not? Not sure where to research, or which section to read...

[Brad Imsdahl]

TTB, 2006 edition, page 14-11 says, “As a U.S. citizen or resident alien, one’s worldwide income generally is subject to U.S. income tax, regardless of where he or she is living.”

Then it goes on to describe the rules on resident aliens and the foreign earned income exclusion.

If there is no specific treaty with special tax rules that apply with a particular foreign country, or there are no prohibitions on a U.S. citizen doing business in a particular foreign country, then a person subject to U.S. taxation would treat income and losses from a foreign source no different than income and losses from a domestic source. That means foreign source losses would be deductible. However, you have to take the bad with the good. Foreign source income would likewise be taxable.