There’s no doubt businesses now operate in a global marketplace – for both the good and the bad.
On the upside, the global economy presents more opportunities for new markets and business growth. And that’s not the only way to increase profits through exporting – businesses that export also may qualify for several lucrative tax benefits.
But – as business is cyclical – we recognize there also are some downsides at times in a global economy. The good news is there’s also assistance available for Lehigh Valley manufacturers negatively affected by the global marketplace.
Read on to see how your company could be helped:
There are several organizations able to assist manufacturers looking to expand their business overseas, including:
Small Business Development Center
SBDC’s International Trade Development Program helps manufacturers 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 manufacturers 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 manufacturing firms expand their business overseas.
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 manufacturer 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 manufacturing 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 manufacturing company deducts the commission amount paid to the IC-DISC from its ordinary income taxed at a 34% federal rate. As a result, the manufacturer 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.
Foreign Competition Assistance
The Manufacturers Resource Center has experience helping manufacturers obtain grants if they’ve been adversely affected by foreign competition. The Mid-Atlantic Trade Adjustment Assistance Center, a non-profit chartered by the Department of Commerce to make small businesses more globally competitive, has up to $75,000 available to companies adversely affected by foreign competition. The grant can be used for almost any project (with a 50% company match), though companies have to have a former client give a written testimonial that they stopped using the U.S. company in favor of a foreign company.
Trade Adjustment Assistance for Firms Funding
The U.S. Department of Commerce offers specific financial assistance to manufacturers affected by import competition. The Trade Adjustment Assistance for Firms can pay for half the cost of consultants or industry-specific experts for projects that improve a manufacturer’s competitiveness. More information can be found at TAACenters.org
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 manufacturers with free or discounted assistance. Contact us here for more information.
Looking for more grant and tax credit opportunities? Check out our Lehigh Valley Manufacturers’ Guide for Growth, which offers details on more than 30 tax strategies, grants, credits, low-interest loans and other business resources to help manufacturers grow. Download your copy here.