Question

USAco, a domestic corporation, manufactures widgets for sale worldwide. In year 2020, USAco had $10 million of net income related to sales of products it manufactures in the US, of which 3 million relates to sales to customers outside the US. USACO also owns a factory, which it uses to produce the above income, and which has an average adjusted U.S. tax basis of $40 million (taking into account the straight-line depreciation method). As a result of these activities, USACo will be allowed a Foreign Derived Intangible Income ("FDII") deduction of _______________

Answer 1

USAco

As a result of these activities, USACo will be allowed a Foreign Derived Intangible Income ("FDII") deduction of _______________

$236,250.

Step-by-step explanation:

a) Data and Calculations

Net income = $10 million

Export sales income = $3 million

Normal tax on $3 million at 21% = $630,000

FDII 13.125% tax on $3 million = $393,750

Difference = $236,250

b) A foreign derived intangible income (FDII) arises from the ownership, sale, or exchange of intangible property, patents, copyrights, trademarks, trade names, or other products tied to intangible assets by USACo, which entitles it to make a tax deduction of the calculated amount or to be taxed at a reduced tax rate of 13.125% instead of the normal 21% corporate tax rate. The FDII is aimed at encouraging US-based corporations to export more goods and services while locating more intangible assets in the US.