Here is some good news for exporters of products and services. The Tax Cuts and Jobs Act (TCJA) of 2017 provided a benefit for corporations that export goods or services by creating a foreign-derived intangible income deduction (FDII), also referred to as a section 250 deduction. This deduction effectively provides a lower tax on exports through a 37.5% deduction on certain export income resulting in a federal tax rate of 13.125% down from the current federal corporate tax rate of 21%. This benefit is only available for C corporations. The initial documentation requirements to support the deduction were quite onerous and deterred many businesses from pursuing the deduction. On July 9, the Treasury released regulations that have provided significant relief in making this deduction much easier to support. If your business operates in a “C” corporation form and you have export sales, we can help you explore the potential benefits you can receive from this deduction.
The export income eligible for the FDII deduction is the excess income over a fixed return (generally 10%) on depreciable tangible property used in the corporation’s trade or business. It’s a very complex calculation, but well worth investigating if the corporation is profitable and has significant export revenue. In order to take the deduction, the taxpayer must have documentation supporting that the revenue was:
1) Derived from a qualified export sale by having specific documentation that the sale was made to foreign persons and
2) The product or service was for foreign use or benefit
The regulations provide detailed information on determining qualification and documentation.
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