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How Businesses Can Start Exporting – And Qualify for Tax Breaks

Posted by Concannon Miller on Tue, Sep 26, 2017

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Tax Benefits - Businesses- gold sign copy.pngThere’s no one way to grow your business. But more and more, as our global marketplace expands, many companies are exploring exporting as a way to boost sales.

The biggest benefit of exporting is that it can expand and diversify both your markets and your customer base. This not only increases your sales but also reduces your vulnerability to a slowdown in a particular market.

And increased sales are not the only way to increase profits through exporting. Businesses that export also may qualify for several lucrative tax benefits.

The good news is you don’t have investigate exporting alone. There are several agencies providing free export assistance to companies, and we have decades of experience helping companies obtain tax benefits for exporting. Read on to see how your company could be helped.

New Call-to-actionExport Assistance

There are several organizations able to assist businesses looking to expand their business overseas, including:

Small Business Development Center

SBDC’s International Trade Development Program helps businesses develop and implement export strategies. Consulting services include:

  • International market research
  • Export alternatives
  • Developing an export strategy
  • Financing methods

The International Trade Development Program also assists businesses with sales leads, product promotion and networking.

Pennsylvania Governor’s Action Team

The Team can connect local businesses with the state’s representatives in 26 countries that can help with exporting opportunities.

U.S. Small Business Administration

The government agency offers a number of export financing programs to help companies expand their business overseas.

READ MORE: The 10 Top Tax Benefits for Businesses

Tax Strategies

These three tax benefits are available to many exporters:

Transfer Pricing: This tax method can be used to sell a product from one subsidiary to another within a company to provide tax savings.

Foreign Tax Credit: If you pay or accrue foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.

IC-DISC: Under an Interest Charge – Domestic International Sales Corporation, exporting companies are allowed to cite a portion of their sales as a commission to the IC-DISC, and then the IC-DISC shareholders only have to pay tax on the dividend income at a preferential rate. Check out this example to understand the potential savings:

Assume a business that generates net income of $2M from export sales currently pays $680,000 of income tax based on a 34% federal tax rate.

Step #1: The company creates a tax-exempt IC-DISC. The IC-DISC is a “paper” entity that does not require office space, employees, or tangible assets. In this example, the IC-DISC is owned by the individual shareholders of the company.

Step #2: The company pays the IC-DISC a commission. The IC-DISC commission may be determined as the greater of 50% of export net income or 4% of export gross receipts. The commission may be increased even more in certain instances. In this case, they pay a commission of $1M (50% of export sales net income) to the IC-DISC.

Step #3: The company deducts the commission amount paid to the IC-DISC from its ordinary income taxed at a 34% federal rate. As a result, the business now pays income tax of $340,000. The commission income for the IC-DISC can be deferred from current taxation up to $10 million of qualified export receipts, subject to an interest charge on its shareholders. For 2015, the interest rate is about 2.4%.

Step #4: IC-DISC pays dividends of $1M to the shareholders. The shareholders pay tax on the qualified dividend income, currently at a federal tax rate of 20%, or $200,000. (Note: The dividends are considered investment income for purposes of the 3.8% medicare tax on investment income.)

Now the total tax paid is $540,000, realizing a $140,000 benefit using an IC-DISC strategy.

READ MORE: How to Find Affordable Consultants to Help Improve Your Company’s Efficiencies

How to Apply

Concannon Miller is personally acquainted with the key personnel at these organizations and can help you navigate with various agencies and programs to determine the route for maximizing your opportunities to get your business on the path for greater success. Many of these organizations provide businesses with free or discounted assistance. Contact us here for more information.

Looking for more grant and tax credit opportunities? Check out our Business Guide for Growth, which offers details on more than 40 tax strategies, grants, credits, low-interest loans and other business resources to help companies grow. Download your copy here.

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Topics: Business tax planning, Business consulting

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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