Tag Archives: foreign base company sales income

International Tax Strategy with the Preparation of Form 5471 for your Controlled Foreign Corporation

The most important part of Form 5471 is not on the Form.  The Form is merely the tip of an iceberg.

You maximize your tax savings by knowing the loopholes found in the IRS regulations.  Let me say that again.  The income tax regulations contain the complex rules of Subpart F income (which is the income that you do not want if you own a small business) that will save you money.

You will find a summary of these tax breaks on the overlooked IRS worksheet (I have it below).  This worksheet ties into the IRS regulations.

The worksheet has a section for each type of subpart F income.  As you study the international income tax regulations, you will see that most active foreign income is not subpart F.   However if your foreign corporation has related party transactions, then it may have subpart F income.   The IRS has many exceptions to this general rule in their regulations.  Related party transaction includes related party purchases of inventory or services and related party sales of inventory or services.

As you will see on the image of the worksheet, you need to complete page one and two.

On the worksheet, you enter the total of each category of your subpart F income.   The worksheet then guides your arithmetic in computing the total subpart F income.

But here is the problem.  You must compute the total gross subpart F income yourself.  Next, you allocate your overall expenses related to each category.

For example,  your foreign corporation manufactures and sells products worldwide.   Some of the sales are to a related corporation.  Related party sales are often subpart F income (see an exception for contract manufacturing on this link).    You compute your gross income (this is the sale price minus the cost of the good sold).

You enter this amount on the form on line 3 (regarding foreign base company sales income).  Next, you get some special tax breaks on line 15.  On page 2 of the worksheet, you complete line 19 by including the amount from line 15.

 And there are more tax savings to come on page 2 of the Form 5471 worksheet.

Form 5471 tax planning

Form 5471’s worksheet is full of tax savings.

Lines 26, 27, 28 and 29 involve heavy duty tax planning.  They include the concept of  “earnings and profits“.     U.S. corporate taxation (for both a domestic corporation and a foreign corporation) focuses on earnings and profits.

To save taxes, you need to be an expert in this concept.   You want your CPA to know this concept like the back of his hand.  You can test your CPA by asking him about this.  If the answer is vague, this means you need someone else to prepare the Form 5471.

Lastly, you take the amount from page two line 38(b) to line 1 of Form 5471 Schedule I.

Smart tax planners use this worksheet to monitor their taxable subpart F income.  This means you should be preparing a proforma worksheet after the six months of your year.    As you read the worksheet, your will see other IRS tax saving ideas such as related party interest expense.

International Tax Strategy for Importers with Contract Manufacturing

International tax planning for the Contract Manufacture

International tax planning for the Contract Manufacturing

A new contracting manufacturing international tax law is allowing small business to reduce taxes.  If you import products into the U.S., you want to look at this new law.

Briefly, you form and control a foreign corporation where you contract your manufacturing.  The corporation manufactures products for you.  It sells these products, at a profit, to your U.S. business or directly to your customers.

The tax law does not tax you on the profit made by this corporation.

The tax provides that the shareholder of a  foreign corporation is not taxable on the income from the sale of personal property (including inventory) manufactured by a corporation formed in the same country as the manufacturing.[1]  In other words, tax on this profit from manufacturing is not taxed.[2]

The sale of the property takes place outside the U.S. This means title to the property occurs anywhere other than the U.S. Usually, the sale takes place when the property leaves the factory of the contract manufacturer.

You or an employee must only do one or more of these activities either via the internet or in person:
(1) Oversee and direct the activities or process which the property is manufactured, produced, or constructed or
(2) Select the materials or the vendor or
(3) Control the raw materials or the work-in-process or the finished goods or
(4) Manage the manufacturing costs or capacities or
(5) Control of manufacturing logistics or
(6) Control the quality such as overseeing the sample testing or establishing the quality control standards or
(7) Develop and direct the use or development of the product, design, and specification.

This is a fantastic tax law.  Importers are reaping significant tax savings. Importer tax plans rely upon a solid IRS regulation for contract manufacturers.

I know that you are busy and   I wish I could place all the tax breaks on a few paragraphs.   However, to have a blog post for as many different types of businesses, this post is a few pages.

If you want to schedule a time to talk, then email me Brian Dooley, CPA, MBT [email protected],

Here is how contract manufacturing tax avoidance works  You do not pay income tax on your controlled foreign corporation income that is not classified as “subpart F income.”  Subpart F is the location in the tax code that talks about the taxable income.  You want your controlled foreign corporation to earn income that is not Subpart F income.

Subpart F income does not include income from the sale of personal property manufactured, produced, or constructed by a foreign corporation.[1]

For example, Ford Motor manufacture in England.  These cars are sold in the U.K. and Europe through independent dealers.  None of the income is Subpart F income.  The income is not taxed by the United States.

Avoiding U.S.  taxes for Big Business like Ford is easy.  They can afford to build a factory.

Now, small businesses have the same opportunity for tax planning.  Contract manufacturing allows the small business to manufacture its products.
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