I have been attempting to figure out the proper filing for a lawful US resident that has made a tax home in a foreign country (passing the bona fide residence test), and derives all income from a sole proprietorship business.

The return itself is considerably past due so there is no expectation to receive any income exclusion credits.

The problem I'm having is understanding the reporting requirements for the business. Is a schedule C required to accompany the 1040 or is the 2555 sufficient?

Also in reading the instructions for 2555, I am under the impression that in addition to the net profits of the business, an amount equal but not more than 30% of the net profits adjusted for the 1/2 SE tax deduction is to be added. Hence compensation would =
NET PROFIT + ((NET PROFIT*30%)-(50% SE TAX)). Is this correct?

You will do in the same way as if the sole proprietor business is in the U.S.A. Then you will use Form 1116 to get foreign tax credit. Read: Your U.S. Tax Return: Tax Filing by Self Employed Sole Proprietor or Independent Contractor

1. You can not use Form 2555 as you are not an employee.
2. Your business income is subject to SE tax at 15.3%.
I don't have any idea about the calculation referred by you. Use a software or get professional help.

Thanks for the reply.

In reading the instructions for form 2555, under the section Part IV "Foreign Earned Income", line 20 references engaging in an unincorportated trade or business. This is where the formula concerning net profits and SE adjustment is mentioned.

You CAN exclude business income using Form 2555, but you MUST pay self-employment tax on that excluded income at 15.3%.

This is an exceptionally complex computation, and is NOT something an amateur should be attempting.

Seek out competent professional tax help.

I spoke with the IRS and the answer I was given is that the schedule c is to be used to report the results of operations as in a typical filing, however the 2555 is used to determine the amount of exclusion taken for housing and foreign income. The treatment for SE tax is the same here as in a typical sched c filing.

My confusion stemmed partly from the instructions line 20 (i.e. the convoluted formula in my orig. post) which even the IRS rep was not able to fully explain. Also I did not realize that the resulting calculation of the 2555 would be reflected as a negative figure on the "Other Income" amount.

Let me reiterate: this is NOT a tax return that should be filed by a layman.

GET PROFESSIONAL HELP!

Thanks. Duly noted. In addition to professional help I always think it's a good idea to get the perspective of those who will ultimately scrutinize the return. Even the professionals will give you their interpretation of the IRC.