New Tax Break for Exporting USA Goods

 

New IRS regulations issued March 4 make it easier for companies to claim a tax break for exporting their made-in-America goods and services.

The release of the regulations give corporations a first look at what they need to do to claim a new deduction in the 2017 tax overhaul, which could lower their export income tax to about 13 percent from 21 percent.

From airlines to defense companies, the Internal Revenue Service clarified that those industries can claim a sizable deduction for the income they earn from selling goods and services made in the United States overseas.

The deduction for foreign derived intangible income, or FDII, was designed to encourage American companies to produce more in the U.S.  The law cut the corporate tax rate to 21 percent from 35 percent and moved the U.S. toward a territorial tax system, so companies don’t owe the full U.S. tax rate on foreign income.

The FDII provision works in tandem with the levy on global intangible low-taxed income, or GILTI, which taxes profits made in countries that didn’t tax them in the first place.

Supply Chains

Corporations are double-checking their supply chains to make sure they can qualify for the $63.8 billion tax break in President Donald Trump’s tax law.

The rules under tax code Section 250 clarify that defense contractors can get the deduction when they sell to foreign governments, a point that had confused the industry. Federal law requires them to sell weapons and missile defense systems through the Department of Defense instead of directly to the buyer.

The substantial tax break has encouraged companies, such as retailers that manufacture domestically and sell overseas, to make sure that their exports qualify for the deduction.  The IRS rules also matter to companies that provide transport services, such as United Continental Holdings Inc.

The airline asked the Treasury Department in September to clarify that the deduction applies to services offered while in transit between two countries. The rules say U.S. airlines can get the full deduction on flights that begin and end in foreign countries. Half of the income from flights that either originate or terminate in the U.S. qualify for the tax break.