Combat Zone pay for government contractor.

[taxman1]

Im familiar with form 2555 foreign income exclusion.  But this taxpayer is a private contractor for the military, working in a combat zone.  Taxpayer received a letter from their employer stating they were in a combat zone and qualify for "combat pay" exclusion.  We file a schedule C for the client and I have searched high and low on how to report combat zone pay exclusion.  Form 2555 doesn't apply in this situation due to not meeting time overseas.  From what I have read on the IRS site, one just writes "Combat Zone Pay" on the top of the 1040 and doesn't claim the pay.  But with combat pay one still pays SS tax and Medicare tax. Plus we have no way of writing "Combat Pay Exclusion" on top of the 1040 and efiling ! 😀   Has to be a way in Proseries to "check a box" to show it was combat pay ?  Or do I just write on other expenses on schedule "Combat Pay Exclusion" and deduct the pay ?  But then Self employment tax is not paid.  What's your take on how to report it ?

[Just-Lisa-Now-]

I dont know the real answer, but you could put the pay on Sch C and let the SE taxes compute, then exclude the pay on the Other Income Line (Combat Zone pay) that would exclude income taxes but still keep the self employment taxes on the return.

[taxman1]

Thats on way to skin a cat !!  Sorry, old school saying.  I personally love cats and have a few.  But that would work.

[sjrcpa]

As I recall, that exclusion only applies to active duty military personnel (W-2 employees), and lower income ones at that.

Have you researched this?

[taxman1]

Yes.  Per IRS instructions, civilian contractors in combat zones qualify.  They state to not include income and write at the top of the 1040 "Combat Zone Pay".   Here is a link https://www.irs.gov/newsroom/questions-answers-on-combat-zone-tax-provisions 

Kind of vague, but tonight I will research it more.  Downloaded  IRS Pub. 3 to read tonight and see if there is any clarification there.  

[qbteachmt]

"Taxpayer received a letter from their employer stating they were in a combat zone and qualify for "combat pay" exclusion."

That "and" might be the problem. I think we are seeing a mix of terminology: combat zone vs combat pay; military members are the only ones eligible for that exclusion because of combat pay.

Contractors might qualify for a different exclusion. Having proof that they were in a combat zone is why they qualify:

https://expattaxprofessionals.com/blog/article/combat-zone-contract-workers-claim-foreign-exclusion

[qbteachmt]

This reference explains spouse:

https://www.irs.gov/individuals/military/tax-exclusion-for-combat-service

[taxman1]

They are stationed at a US Base and act as armed support for military missions.  But they do not meet the 330 days.  Even using the slide rule method of days overseas they do not meet the 330 days.  I will look a form 2555 again, been a few years since I have done one.  Maybe there is something new there.  But the IRS web site information "can and will" contradict itself.  

[sjrcpa]

I agree, not eligible for foreign earned income exclusion since physical presence test not met.

[qbteachmt]

"They are stationed at a US Base and act as armed support for military missions.  But they do not meet the 330 days."

They are not enlisted, not a member of an armed forces, not military, not spouse of military? In other words, they are in a combat zone, but don't qualify for the combat zone tax exclusion. But, as a citizen:

"contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones will qualify for the foreign earned income exclusion (“FEIE”) even if their “abode” is considered to be in the United States while they are abroad."

Are you looking at the right information?

[BobKamman]

I think someone is trying to skin a dog, thinking it's a cat.  Let's not mix up combat pay exclusion (military only) and foreign earned income exclusion (ok to still have a US abode but you still have to spend enough time in a combat zone).

"Beginning tax year 2018, contractors and employees of contractors supporting the U.S. Armed Forces in designated combat zones may now qualify for the Foreign earned income exclusion (FEIE). To claim the Foreign earned income exclusion, you must meet the Bona fide residence test or the Physical presence test.  The Bipartisan Budget Act of 2018 changed the tax home requirement for eligible taxpayers, allowing them to claim the Foreign earned income exclusion even if their "abode" is in the United States."

https://www.taxesforexpats.com/guides/contractors-abroad.html 

[taxman1]

So your saying with the 2018 changes that the 330 days abroad does not apply anymore ?  Like I mentioned Im going to research it more tonight when I have time.  Figured someone else has come across this situation.  But no they are not active military, they are retired military working as a private contractor for the military.  Paid on a 1099NEC, but in a combat zone. 

[taxman1]

Lets not confuse combat pay with combat zone either.  This is from the IRS site. 

These items offer guidance on the tax relief provided for U.S. military and support personnel involved in military operations in a combat zone. 

Civilian taxpayers covered by the relief provisions described here should put the words "COMBAT ZONE" and their deployment date in red at the top of their tax returns. Members of the military do not need to write "COMBAT ZONE" and their deployment date on the tops of their tax returns because the U.S. Department of Defense informs the IRS about members in the combat zone.

Covered civilian taxpayers who receive a notice from the IRS regarding a collection or examination matter should return the notice to the IRS with the words "COMBAT ZONE" and the deployment date in red at the top of the notice and put "COMBAT ZONE" on the envelope so the IRS can suspend the action. Taxpayers may prevent issuance of such notices by notifying the IRS that they are working in a combat zone.

• Combat Zones (Q & A-1)
   
• Military Pay Exclusion (Qs & As 2-10)
   
• Extension of Deadlines (Qs & As 11-31)
   
• Miscellaneous Provisions (Qs & As 32-35)
   
• Employers with Employees in a Combat Zone (Qs & As 36-48)

[taxman1]

This is from the IRS site concerning who is considered an "Eligible Member" of the US Arm Services for Combat Zone pay exclusion.  Not the last paragraph concerning "Civilians"

You must be serving or have served in one of the following organizations to be eligible for military tax benefits. For specific information on benefits, go to the Military home page.

United States Armed Forces

If you are a member of the Active Component or Reserve Component of an Armed Force listed below, you may be eligible for military tax benefits. Recently retired or separated members may also be eligible for benefits.

• United States Army (including Army Reserve and Army National Guard)
• United States Navy (including Navy Reserve)
• United States Air Force (including Air Force Reserve and Air National Guard)
• United States Marine Corps (including Marine Corps Reserve)
• United States Coast Guard (including Coast Guard Reserve)
• United States Space Force (including Space Force Reserve)

Uniformed Services of the United States

If you are a member of a uniformed service, you may be eligible for military tax benefits. These organizations include:

• United States Public Health Service Commissioned Corps
• National Oceanic and Atmospheric Administration Commissioned Officer Corps

You should review Publication 3, Armed Forces Tax Guide and consult your servicing human resources department to determine your options.

Support Organizations

If you are a member of an organization directly supporting military operations and working in a combat zone, you may be eligible for a tax extension. Such employees may include:

• Civilian Employees
• Contractors
• Red Cross Members

[BobKamman]

What's there to note in the last paragraph?  That they are eligible for extensions?  That's not the question.  

[taxman1]

A reply earlier stated only "active military" were eligible for the Combat Zone exclusion.  Not the case.  My last post says nothing about Extensions 😂    

[BobKamman]

@taxman1 Your last post copied and pasted this:

If you are a member of an organization directly supporting military operations and working in a combat zone, you may be eligible for a tax extension. Such employees may include:

• Civilian Employees

[qbteachmt]

Going all the way back to here: "Im familiar with form 2555 foreign income exclusion.  But this taxpayer is a private contractor for the military, working in a combat zone."

It's the "but" that doesn't apply. Yes, that's the form and the exclusion.

You stated this: "Taxpayer received a letter from their employer stating they were in a combat zone and qualify for "combat pay" exclusion."

So, it would already be taken into consideration on the W2, if they are eligible.

But then you stated this, "We file a schedule C for the client" so there is no employer. They are a contractor.

"Form 2555 doesn't apply in this situation due to not meeting time overseas"

Yes, that is a test for your person to meet.

"on how to report combat zone pay exclusion."

Have you seen where your citizen qualifies for this? We haven't.

"Per IRS instructions, civilian contractors in combat zones qualify."

That's not how it reads.

"Civilian taxpayers covered by the relief provisions"

Have you read "the relief provisions?" I did. It means, just because you are not fighting on the front line, a support ship position is still a qualifying position, for example.

I included the spousal link intentionally.

Combat Zone is its own qualification.

Combat Pay is its own qualification.

One does not presume the other.

[qbteachmt]

By the way, is your person employed by DOD or similar? Citizen employees such as, of DOD, have some benefits that contractors do not get.

[taxman1]

They are paid on a 1099NEC by one of the Military's biggest contractors.  Back to my original post at the top.  So everyone's opinion is that this pay does not qualify for any type of exclusion ?  I knew they didn't qualify for form 2555 because they didn't meet the 330 day test.  But I didn't know if there was anything else I was not aware of.  The "employer" who issued the 1099nec stated in a letter that the income is eligible for "Combat Zone Exclusion".  Now whether the exclusion they stated is tied to form 2555, I dont know.  They referenced nothing in that letter other than they were employed in a combat zone.  Hence my original post asking if there is something I missed.  Guess its all taxable.

[qbteachmt]

"whether the exclusion they stated is tied to form 2555, I dont know.  They referenced nothing in that letter other than they were employed in a combat zone."

Yes, and that was a fairly recent provision related to the presence test:

https://www.irs.gov/newsroom/new-law-makes-clear-combat-zone-contract-workers-qualify-for-foreign-ea...

They are noting something important, but they don't know if it applies to the taxpayer.

https://www.taxesforexpats.com/we-help/army.html

This went nowhere:

https://www.everycrsreport.com/reports/RL33230.html

And don't forget: "Taxpayers choosing the foreign earned income exclusion cannot take advantage of any other exclusion, deduction or credit related to the excluded income. This includes any expenses, losses or other items that would have been deductible had the exclusion not been claimed."

[taxman1]

The letter references no IRS code or anything.  I would call the IRS but I doubt I would get anyone familiar with the question.  When I read the original link I posted, it seems one could just deduct the income and attach a note stating the income was earned in a combat zone as a military contractor.  But still paying SE tax of course.  Im going to read Publication 3 (Armed Services Tax Guide) tonight and see if I can get anything out of it.  Thanks for all the help and sorry I wasn't clear on some things.

[sjrcpa]

Please do research. It's taxable; no exclusion.

[qbteachmt]

"The letter references no IRS code or anything."

Why would it? It's stating a useful fact: the work is considered to be in a Combat Zone.

That doesn't mean they got combat pay. Even you noted that isn't how this letter reads and you misstated this in your title

"The "employer" who issued the 1099nec stated in a letter that the income is eligible for "Combat Zone Exclusion"."

It means any provision where Combat Zone matters, is applicable, if the taxpayer qualifies. It's right here, follow the link:

https://www.irs.gov/newsroom/new-law-makes-clear-combat-zone-contract-workers-qualify-for-foreign-ea...

"The new law makes it clear that contractors or employees of contractors providing support to U.S. Armed Forces in designated combat zones are eligible to claim the foreign earned income exclusion."

It sure is helpful when you stop using the word "employer" with "1099-NEC" because that leads you and your taxpayer clients down the wrong rabbit hole.

[taxman1]

I understand.  I have filed form 2555 many times.  I was questioning the IRS link I provided in my third post and other IRS info I read.   https://www.irs.gov/newsroom/questions-answers-on-combat-zone-tax-provisions

Thought I was missing some new "Combat Zone/Pay regulation.  Guess not.  Carry on my wayward son

[qbteachmt]

"I was questioning the IRS link I provided in my third post and other IRS info I read."

You mean, this part: "They state to not include income and write at the top of the 1040 "Combat Zone Pay"."

It doesn't state "pay." It states simply: Combat Zone.

It's not related to the Pay being tax free. It's related to the exclusion provision, in this case, specific treatment. You took heart at the wrong exclusion for this taxpayer, even if they met the presence test.

It's important to leave the info corrected, for others who might get this topic in search results.

[jdrob]

I am a contractor working part of the year overseas and much of it in a combat zone.  Lets set the combat zone portion aside for a moment for the purpose of the discussion.

Lets say I am a contractor, working overseas for part of the year and want to claim the foreign earned income tax exclusion what eligibility requirements do I need to meet in order to claim the exclusion?

Now lets add to the mix this work is in a combat zone; now what requirements to I need to meet in order to claim the exclusion?

In both cases, even before the "new law", the contractor qualified for the foreign earned income tax exclusion as long as they met the 330 days abroad test.  With that being the case, what was the purpose of the new law?  What is different between combat zone vs non-combat zone employment?

My interpretation is that the new law, treats Combat zone contract workers in a similar manner as active duty military members.  "U.S. citizens or resident aliens, specifically contractors or employees of contractors supporting U.S. Armed Forces in designated combat zones" may claim the exemption without establishing an "abode" overseas and retain their "abode" within the U.S.

As stated by qbteachmt its in the title of the irs.gov article "

New law makes clear: Combat zone contract workers qualify for foreign earned income exclusion"

It is my understanding that being a contractor in a combat zone is what qualifies you and negates the physical presence test, bona fide residence test and tax home test.  

The whole point of this new law was to enable contractors in a combat zone (less than 330) to be eligible for the exclusion - otherwise whats the point of the new law - since these people, regardless of combat zone or not, would be eligible as long as they meet the standard requirements for the exclusion.

[qbteachmt]

@jdrob 

"I am a contractor working part of the year overseas and much of it in a combat zone"

Are you using ProSeries for preparing clients' tax returns?

If so, I would advise you to start a new topic and explain only the details that pertain to your taxpayer client. This specific topic was for a person who was not an employee, so the letter given to them, while working Stateside, didn't even apply to their payments (which were not wages).

And I don't see where you asked the specific question you are looking for help with. But, if you read this topic carefully, perhaps it will clarify your issue. Focus on Combat Pay vs Combat Zone, because only military gets combat PAY. Combat Zone includes "in support of" military that is not deployed.

[taxman1]

I started the post.  The taxpayer in question was not "Stateside" while working .  He just didn't meet the 330 day requirement (even under the sliding rule).  He was in a combat zone while overseas working.  Stateside he was at home relaxing. I was trying to figure out if there was an IRS change for those who didn't meet the 330 days.