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The United States offers some unique tax breaks for individuals and businesses.
- Some tax deductions and tax credits for businesses and individuals are unique to the United States tax code.
- The Foreign Earned Income Exclusion, for example, allows expats to avoid paying US taxes on income earned in the country where they live and work.
- New under the Tax Cuts and Jobs Act is the Qualified Business Income deduction for corporations that earn income from customers outside the US.
The United States has an undeniably complicated tax system.
Despite President Trump's passage of the Tax Cuts and Jobs Act, the most significant overhaul of the US tax code in decades, the Tax Foundation ranked the US 24th on its 2018 International Tax Competitiveness ranking - only five spots ahead of its 2017 rank.
The Tax Foundation considers dozens of metrics, from corporate and individual tax rates to how taxes are structured, to determine which countries have the most competitive and neutral tax system.
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With this international comparison in mind, we enlisted the help of Ryan Losi, executive vice president of accounting firm PIASCIK, to highlight some of the tax breaks that are unique to businesses and individuals in the US. Losi leads the firm's international tax practice and has worked with clients in nearly 60 countries.
Below are five tax breaks you can only get in the US and a brief explanation of each.
Foreign Earned Income Exclusion
With the Foreign Earned Income Exclusion, Americans who live and work abroad don't have to pay US taxes on their earned income - salaries and wages, professional fees, tips, bonuses, and commissions - up to $104,100 in tax year 2018. The income must be earned in the country of residence to qualify.
Interest Charge Domestic International Sales Corporation (IC-DISC)
The Interest Charge Domestic International Sales Corporation (IC-DISC) reduces an income tax liability for business owners who export their products abroad.
"You're converting business income, which is taxed at the owners' tax rate, and transmitting it to qualified dividend income, which is a preferential tax rate," Losi said. "It's not well known, but it has a significant benefit. It's a magical deduction you can use."
Foreign-Derived Intangible Income (FDII)
New under the Tax Cuts and Jobs Act (TCJA), the Foreign-Derived Intangible Income deduction reduces the tax rate on qualifying income for corporations that earn income from customers outside the US.
"Whatever income you have coming in from customers outside the US, your corporate tax rate is 13.125%," Losi said. Qualifying income includes income from the sale of property or products, as well as services.
Qualified Business Income Deduction
Also new under the TCJA, the Qualified Business Income deduction allows small business owners to deduct up to 20% of qualified business income, or 20% of their taxable income minus any capital gain, whichever is lower.
"The complexity is determining what is QBI," Losi said, though generally it refers to the business' profits. Business owners can claim the deduction if their taxable income is lower than $157,500 for single filers and $315,000 for joint filers - any higher and the benefits begin to phase out. Business owners are still required to pay self-employment taxes.
100% Bonus Depreciation
"Any business in America for the next four years can deduct 100% of capital expenditures as long as it's not real property," Losi said. That means businesses can deduct the entire cost of new machinery, equipment, furniture, and most interior building improvements up to $1 million under the TCJA, double the previous amount, if it was placed in service after September 27, 2017.
"I don't know of any other countries that allow this," Losi said. "Other countries have capital allowances, but not 100%, and this applies to both new and used properties."