California CPA for Exclusion of Foreign Derived Intangible Income

Cook CPA Group

The Foreign-Derived Intangible Income deduction (also known as the FDII deduction) is a crucial part of the Tax Cuts and Jobs Act of 2017. It enables part of a corporation’s income to be taxed at a rate of only 13.125% and allows them to claim a deduction of 37.5%. A taxpayer’s foreign-derived intangible income is the income that is in excess of 10% of their Qualified Business Asset Investments.

Taxpayers that would like to claim their foreign-derived intangible income deduction can use the assistance of an experienced California CPA. If you are interested in learning about whether you qualify for the foreign-derived intangible income deduction, call Cook CPA Group as soon as possible at (916) 432-2218.

Understanding the Basics of Foreign Derived Intangible Income in California

The Foreign-Derived Intangible Income deduction enables a portion of a corporation’s foreign-derived intangible income to be taxed at a lower rate. It mostly benefits technology corporations and pharmaceutical manufacturers, and other businesses that are involved in the production of intangible materials that generate foreign sales.

The Tax Cuts and Jobs Act of 2017 had a large impact on the U.S. tax code. One opportunity that it created for taxpayers was the foreign-derived intangible income deduction. By using this exclusion, corporations that sell goods and services to foreign customers can claim a tax rate on qualifying income of 13.125%. Its purpose is to incentivize domestic corporations to provide products and services to foreign markets. The rate of 13.125% is significant in comparison to the regular corporate tax rate of 21%. Taxpayers can also claim a deduction of 37.5%.

This deduction is only available to be claimed by domestic entities that are taxed as C corporations. They may either be companies that are based in the United States or companies that are based elsewhere but still do business in the United States. Exporters of goods and services that are not Controlled Foreign Corporations (especially companies that have high margins and limited tangible assets, such as technology companies) can benefit from this deduction, especially since it does not require the taxpayer to identify intangible assets, valuations, or segregation studies.

How to Qualify for the Foreign-Derived Intangible Income Exclusion

Taxpaying businesses in California can only claim the foreign-derived intangible income exclusion if they qualify—this deduction is only available for domestic corporations and individuals that have elected for section 962. Real estate investment trusts, regulated investment companies, partnerships, limited liability companies, individuals, and S corporations are not eligible for the foreign-derived income exclusion.

Only certain types of income are eligible for the foreign-derived intangible income deduction. The types of income that qualify are property that is sold by the taxpayer to anyone that is a foreign person and services that are provided by the taxpayer

Both types of income must meet the satisfaction of the Secretary. Taxpayers should note that there are special rules when determining the income of transactions that involve property or services that are provided to parties that are related to the taxpayer. If property is sold to a property that is related to the taxpayer, the foreign-derived intangible income deductions can only apply if the sales property is either resold or used in connection with property that has already been sold. Taxpayers should also note that property that is sold to a foreign person cannot be considered to be sold for foreign use if it was further manufactured or modified within the United States.

How a California CPA Can Help with Foreign-Derived Income Exclusions

Many of the provisions associated with the Tax Cuts and Jobs Act are complex and require expertise and careful attention to be completed, and the foreign-derived intangibles income exclusion is no exception. Claiming the foreign-derived intangible income deductions requires thorough and detailed documentation in order to substantiate the deductions and certify compliance with regulations set by the IRS. Furthermore, calculating deductions is an involved, multi-step process. Taxpayers can be certain that they are claiming this deduction accurately if they use the assistance of an experienced CPA to file forms, perform computations, maximize deductions, and avoid pitfalls.

Given the complex nature of claiming the foreign-derived intangible income deduction, mistakes and complications are common. Missteps that taxpayers frequently face include improper classification of gross income and expense allocation, failure to consider cost structures, failure to plan for the taxpayer’s applicable accounting methods, improper review of types of gross income made by the taxpayer, and a failure to fully consider the way that foreign-derived intangible income relates to other tax provisions. To prevent these complications, it’s advisable to claim the foreign-derived intangible income deduction with the supervision of an experienced accountant.

Another reason that the foreign-derived intangible income exclusion requires the assistance of an accountant in California is that taxpayers are required to file a large number of forms. To claim this deduction, the taxpayer must file the following forms:

  • Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI), along with their annual income tax return
  • Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
  • Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code); and
  • Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships

Work with California Foreign-Derived Intangible Income Exclusion Accountants

The CPAs that work with California CPA firm Cook CPA Group are available to help taxpayers claim their foreign-derived intangible income exclusions. Get in touch with us soon to schedule a consultation to discuss your foreign-derived intangible income and other issues regarding tax planning. Call (916) 432-2218.

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