Question

The source rules determine if an income or deduction is a US source or foreign source. Your client, Robin, is in her first year of business and is trying to get clarification on the source rules. Identify one source of income and one source of deduction and explain to Robin how its source is determined. Be sure to explain how the allocation and apportionment process works for the deduction.

Answer 1

If the income is for personal services performed partly in the United States and partly outside the United States, you must make an accurate allocation of

income for services performed in the United States. In most cases, other than certain fringe benefits, you make this allocation on a time basis.

That is, U.S. source income is the amount that results from multiplying the total amount of pay by the fraction of days in which services were performed in the U.S.

This fraction is determined by dividing the number of days services are performed in the United States by the total number of days of service for which the compensation is paid.

Example. Jean Blanc, a citizen and resident of Canada, is employed as a professional hockey player by a U.S. hockey club. Under Jean's contract,

he received $150,000 for 242 days of play during the year. This includes days spent at pre-season training camp, days during the regular season,

and playoff game days. Of the 242 days, 194 days were spent performing services in the United States and 48 days performing services in Canada.

The amount of U.S. source income is $120,248 ((194 ÷ 242) × $150,000).