A New Tax Incentive for Corporations with Foreign Exports and Foreign Services
The Tax Cuts and Jobs Act of 2017 (TCJA) created a new tax incentive for domestic U.S. C Corporations who generate revenue from serving foreign markets. This new tax incentive is called Foreign-Derived Intangible Income (FDII). FDII is a new category of income and it’s not just from income derived by intangible assets. Instead, it is income from sales of property to an unrelated non-U.S. person for foreign use, and for services provided to any unrelated person or property located outside of the United States.
Generally, FDII assumes a fixed rate of return on a company’s qualified business assets. The excess of a company’s net income over the fixed rate of return is essentially the net income derived by intangible assets. The calculation of FDII is complex and requires specific information to be identified. However, this new tax incentive could allow a C Corporation a tax deduction of 37.5%, essentially lowering the new corporate tax rate specifically for this new category of income from 21% to 13.125%.
FDII is effective for tax years beginning after December 31, 2017 and before January 1, 2026, after which the deduction is reduced to 21.875%, resulting in an effective tax rate of 16.406%.
Sax’s Manufacturing & Distribution Practice will keep you posted on updates as they emerge. For more information on tax incentives for your business, reach out to a Sax advisor at (973) 472-6250.