Before the TCJA
Before the enactment of the TCJA, there existed a U.S. worldwide tax system in which all U.S. companies were taxed on income derived in the states or abroad. The corporate tax rate was 35 percent.
The New Law
Arguably one of the most significant changes for businesses exporting products internationally, the TCJA implemented a Foreign Derived Intangible Income (FDII). Essentially, the law creates a preferential tax rate to encourage domestic exports of tangible products and services to foreign markets—so that businesses keep intangible property (such as patents, trademarks, and copyrights) in the states. Further, the TCJA implemented a decrease in the corporate tax rate to 21 percent. Agribusinesses that perform international business are encouraged to continue exporting goods, such as soybeans, grain products, and fibers, while keeping the sale of intangible property in the U.S.
The FDII applies to qualified foreign derived income by a domestic corporation sold to a non-U.S. individual or company for foreign use. Eligible income in excess of a 10 percent return on qualified business asset investments is taxed at a reduced rate of 13.125 percent. The deduction is currently 37.5 percent of foreign derived intangible income for the tax year, with the deduction set to reduce for tax years after 2025 to 21.875 percent (with an effective tax rate of 16.406 percent). Therefore, eligible agriculture companies may want to take advantage of the deduction rate before it decreases.
Limitations & Qualifications
The corporate FDII deduction is, nonetheless, limited by taxable income. In addition, the term “intangible” is a misnomer, as it can apply to any type of income. Businesses only qualify for the FDII deduction if they are a C-Corporation.
It should be noted that calculating your FDII can be a complicated process; while the benefits are likely to encourage an agribusiness to pursue the tax incentive, the process should be performed with a knowledgeable tax professional.
At this point, agribusinesses that are not already a C-Corporation will want to analyze whether a conversion would or would not be in their best interest. As well, it’s significant to gather a full understanding of what U.S. exports qualify for the FDII. Speaking with a seasoned tax expert can help you tackle the FDII and possibly offer your agribusiness ample tax benefits. Please reach out to a Sikich advisor with your questions or concerns.