Don't Let Your Clients Miss This Once In A Lifetime Tax Deduction!
If your client's products make their way out of the country either by direct exports or as part of another exported product, they have a once in a lifetime opportunity for tax savings but they need to act fast!
There's a little known tax deduction (technically a "tax exclusion") that can save substantial taxes for some businesses. It's the "extraterritorial income exclusion" (ETI exclusion), which applies to 2000, 2001, and likely 2002 returns. Any business that has direct or indirect foreign sales might be able to exclude up to 30% of their net foreign sales from tax.
This exclusion is a lot different than its predecessors, the "Domestic International Sales Corporation (DISC)" and the "Foreign Sales Corporation (FSC)." The ETI rules are simple. Your client does not need to have a foreign physical presence (in most cases). Your client does not need to have a registered foreign sales agent. They do not need to set up a separate company nor make any special tax election.
Here is the bottomline. The ETI exclusion applies to both direct export sales and indirect export sales. For example, your client may not export directly, but I bet they sell to a manufacturer or distributor that does export. As long as their products are sold for ultimate use outside the United States, the ETI exclusion applies. In other words, any manufacturer or distributor of products that ultimately have an end user outside the U.S. can qualify for this special tax benefit.
Take a look to see if your client qualifies today because this exclusion will likely be gone tomorrow. To explain why this exclusion may go away, a brief understanding of the history of foreign tax exclusions is required. Click here.
Extraterritorial Income -- Income that is excludible to the extent that it is qualifying foreign trade income.
Qualifying Foreign Trade Income -- Amount determined by statutory percentages of, foreign trading gross receipts (1.2%), foreign trade income (15%) and foreign sale and leasing income (30%). (Limited to 200% foreign trade income method amount if foreign trading gross receipts method is used).
Qualifying Foreign Trade Property -- Property destined for sale or use outside the U.S., no more than 50% of the value of which is attributable to articles manufactured, produced, grown, or extracted outside the U.S. plus the direct costs of labor performed outside the U.S.
The World Trade Organization (WTO) ruled that the ETI Exclusion laws were a form of export subsidy, which is in violation of the International Trade Agreements. As a result of this decision, the WTO held that the United States must eliminate the violation. The U.S. has appealed the decision of the WTO, but until the appeal process is finalized and/or U.S. legislation is enacted, the ETI exclusion is a legal means to reduce your client's tax burden. Most likely, the ETI exclusion will be revoked in 2003, so act now. Dugan & Lopatka can help your client identify their ETI exclusion amount and amend prior year tax returns where appropriate to do so.
Not every CPA firm is familiar with the ETI Exclusion or with its complicated calculations. If your client's CPA firm didn't discuss the ETI with them, it's not a surprise. Most CPAs are generalists and can't specialize in all areas of the tax laws. Maybe it's time you considered encouraging them to switch to a higher quality, proactive accounting and consulting firm,like Dugan & Lopatka.
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Last modified: February 4, 2003
