Published January 2002

Income exclusion
benefits exporters

Herald Business Journal Staff

More than a year ago, a federal tax law went into effect that provided incentives for businesses involved in foreign trade. Today, financial advisers are still busy getting the word out.

“We’ve been busy educating our clients and assessing whether they are eligible for the exclusion,” said Kurt Lippmann, Senior Tax Manager at Moss Adams’ Everett office.

Known as the FSC Repeal and Extraterritorial Income Exclusion (EIE) Act of 2000, the bill was signed into law Nov. 16, 2000, and was retroactive to Oct. 1 of that year.

In brief, the EIE tax law replaced the Foreign Sales Corporation law, opening the doors for more companies to reap the benefits of the exclusion.

For most companies, the benefit is the greater of two options: 15 percent of qualified foreign trade income or 1.2 percent of qualified foreign trade in gross receipts.

“The EIE law is more flexible and thus a greater number of companies are eligible,” Lippmann said. For instance, under the new EIE, all U.S.-based corporations and U.S. citizens or residents owning interest in sole proprietorships, partnerships, limited liability companies or S corporations are eligible for the exclusion.

Also, there are no longer the costly requirements of maintaining an FSC entity in order to claim the tax benefits from export activities.

To qualify for the exemption, there are three major hurdles to clear, Lippmann said:

• The product has to be manufactured by a qualifying U.S. taxpayer.
• Foreign content of the product cannot be greater than 50 percent of the fair-market value.
• There must be proof that the goods were ultimately consumed outside the United States.

To make use of the exemption, IRS form 8837 must be filled out and attached to the income tax return.

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