The Internal Revenue Service: helping you finance your exports.

• Author: Lambert, Glen L.
• Position: A discussion on foreign sales corporation tax incentives - advantages and advice

THE INTERNAL REVENUE SERVICE Helping You Finance Your Exports

For several years you have been entitled to a tax break on profits generated through exporting. Recognizing the many benefits of exporting, such as increased employment, reduced trade deficit, increased tax revenues, and so forth, Congress enacted legislation in 1986 that provides tax incentives to American exporters. This legislation authorizes exporters to establish a Foreign Sales Corporation (FSC).

Taxs to Be Saved by Forming an FSC

The following example is a simple illustration of how much taxes can be saved with an FSC, assuming $1 million in export sales and a net profit margin of 20 percent. The key factor in the following formula is the net profit margin. The higher the margin, the higher the tax savings. The 5.1 percent savings result from applying the FSC rules which regulate how much of the FSC earnings are taxable.

Export sales $1,000,000 Net-profit percentage x 20% Pretax profit of exports 200,000 Reduction of effective

tax rate x 5.1% Tax Savings $ 10,200 These savings must be compared with what additional costs may be incurred. I'll discuss these costs later. All businesses, especially manufacturers, are constantly looking for ways to increase their net profit margin. A cost cut of as little as .5 percent or more adds to the net profit margin and often makes the difference between the success or failure of a business. Forming an FSC could cut the effective tax rate by more than 5 percent.

Companies That Will Not Benefit

As with any provision in the Internal Revenue Code, the rules tend to be complex and the benefits will not apply to all companies, including the following:

* Companies with no exports. * Companies not currently paying any federal taxes. If your company is currently generating net operating losses (NOLs), defer formation of an FSC until all NOLs have been utilized. * Companies with minimal exports where benefit cannot exceed costs of establishing and maintaining an FSC. * Companies that have or may have excess foreign tax credits. * Corporation that have elected S Corp status will not gain maximum benefit of an FSC.

How to Qualify

An FSC be incorporated outside U.S. customs territory. The U.S. Virgin Islands is a popular location. Several FSC service companies have been formed to assist U.S. exporters. These service companies will take care of all the legal steps required to initially form the FSC and maintain it over the years.

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