The amazing tax savings of international business income has been used by firm such a Google, Amazon, Ford and other big businesses for a century. Now, small business get the same big tax break.
What are the tax savings of international business income?
No U.S and no state income taxes for a start. And there is more in the form of compounding growth. Privately owned businesses do not have access to capital (money) from the public. Money is from banks (yuk) or from after tax profits.
The faster a business grows, the more money it needs to cover increase payroll, more rent and the cost of additional inventory. Bank debt is risky because a few slow paying customers can cause you to go into default.
After tax profit is greater when the tax is smaller. International business income can be taxed at zero; however, the usual tax rate is about 17%.
Ian has a business in the United States and in Canada. They both make $100,000 a year. With a 15% Canadian tax, the Canadian business has $85,000 after tax to purchase more inventory.
Back in the United States, with a combined U.S. and state tax rate of 40%, the business has only $60,000 to purchase more inventory.
The Canadian business sales more inventory because it has more inventory. The profits keep compounding faster in Canada.
The Zero percent tax rate applies to international business income from ecommerce businesses that sale intangibles (such as travel services, music, cloud storage, e-books, entertainment and information).
These business’s hub is their computer server. The source rules (on this link) provide that many (not all) e-commerce income is foreign source when the computer server is located outside of the United States.
E-commerce tax planning is new only because ecommerce is new.
International business income from intangibles has unique tax laws. With property planning, the international business income can be foreign source income. I want to emphasize proper planning.
Planning needs to start when you start the business. When a firm like Google plans a new product, they have also completed the tax plan. While small businesses start the business and bungle along until year end. Then they discover they owe lots and lots of tax.
If you want to learn more, then please check out this blog on the topic.