“Why is it that if you take advantage of a corporate tax break you’re a smart businessman, but if you take advantage of something so you don’t go hungry, you’re a moocher?” — Jon Stewart
Through this border adjustment tax, the promise is that if a business can create a product or in the United States and sell it in another country, the feds will keep their noses out of it. The orange-tinged face of the White House wants you to believe this could benefit you because businesses wouldn’t theoretically pay tax on export-based profits.
While this has not yet been enacted, it warrants further exploration. Some of my clients are motivated to prepare for this possibility, while others are deterred and feel it’s a way for the new administration to strong-arm businesses into creating jobs. Let’s review whether domestic production is a viable move for your business.
A question of nexus
Let’s begin with the question of nexus, or your “sufficient physical presence.” If you have one office or base of operations but plan to do business outside your state, you may have to collect and pay taxes on that customer’s purchase and the income derived from that state. The same holds true country-to-country. As previously discussed, earning income in a state in which a limited liability company is not domiciled creates nexus and may require you to pay these additional taxes. Online retail and e-commerce has turned nexus into something of a gray area, because the laws vary from state-to-state and country-to-country.
Crunch the numbers
Weigh your overseas production costs against domestic costs. It’s safe to assume that your materials and international workers cost less than U.S.-based ones. By moving production here, how much will you save on shipping, tariffs, materials and processes? If that number doesn’t neutralize the likelihood of workers’ increased pay, then it might not be viable. Also consider whether these new costs can be passed on to your customers.
Consider the timing
I’m all for globalism, but it only works if the timing is right for your company. First, identify whether there’s a gap in another country’s market that you can fill with your product. Selling your product internationally can offer all sorts of opportunities for you, including new consumer bases and markets. Overseas sales also can expose you to all sorts of predators, copycats and scams. Having some sort of knowledge in the new territory, or having a business partner or liaison should help you avoid those issues.
Create a strategic plan
Will you be testing the waters or seizing an opportunity? Say you’ve identified that gap in another country’s market and feel the ROI might be worthwhile. Draft projections for six months and one year. Will your presence be limited strictly to e-commerce?
These are just a few of the questions to ask yourself and your partners if you’re looking to exploit these tax breaks. I’m usually of the mindset of staying lean and mean, but that’s not to say you can’t strategically expand your presence. Contact Brinen & Associates to help you make the right production and expansion decisions for your business.