Ways to reduce tax cost in USA.

Tax Breaks for Exporters

As our global business environment continues to evolve, Congress has created tax incentives to stimulate the export of goods outside the U.S. These incentives provide a reduced tax rate of almost 16 percent on gross profits earned on export sales. This translates to permanent tax savings for these businesses, helping them compete more effectively with their global counterparts.

Incentives for Products Made in the U.S.

The federal government provides tax breaks for companies that manufacture, construct, design, grow, or extract their goods in the U.S. This is an incentive designed to encourage job growth and production in the U.S. and it can result in a reduced effective tax rate of 3.5 percent for companies and their shareholders.

Tax Opportunities to Encourage Research Spending

Concerned that declining research spending could adversely affect U.S. economic growth, productivity gains, and competiveness within global markets, Congress introduced the Research and Development Credit to encourage domestic investment. Companies that devote significant time and resources to improving product design and processes as well as new product development can benefit from this credit. Originally geared toward the science and technology fields, the R&D credit has evolved to benefit other industries where these qualifying activities take place.

Offshoretransfer payments.One of the favorite ways for companies to slash their tax bills is by setting up foreign subsidiaries to make raw materials and components in countries with low tax rates. The companies’ U.S. operations then purchase these parts from the foreign units at well above cost. By doing this, the overseas unit makes a large profit, which then escapes U.S. taxes, as long as it stays in the foreign country, Yee says. Transfer payments are used at Bristol, Forest Labs, Agilent Technologies, Eaton and Lam Research, he says. Many companies are likely waiting for a U.S. tax-holiday, giving them a chance to bring the cash to the U.S. tax-free, Yee says. Agilent and Bristol declined to comment. The other companies didn’t respond.

5.Harvesting losses. Most of the companies with effective tax rates of zero, or even negative, are money losers. While Hewlett-Packard, J.C. Penney and E-Trade pay taxes, since they lose money, they have negative effective tax rates due to the way the number is calculated. Yet, some big companies that have lost money in the past accumulate credits that can be used to offset tax bills in future years. These reserves can be very lucrative and give profit a boost by lowering the effective tax rate, Yee says. Companies with these tax loss reserves include General Motors and Crown Castle, he says. GM, for instance, released credit from its reserve, taking it down from $45 billion to $11 billion. Investors must be aware, though, that once that $11 billion reserve is used up, the company’s tax rate returns to the statutory rate. All this follows tax rules, but investors need to be aware. “This isn’t anything illegal, but the reserve will run out,” Yee says. GM declined to comment. The other companies didn’t respond.

Accounting rules.A big reason that Verizon’s effective tax rate is so low, coming in at a negative 4.8%, is largely due to accounting. The company’s sped-up depreciation, severance and pension costs are large credits that contribute to pushing the company’s taxes down, says Jonathan Schildkraut ofEvercore. But there’s also a distortion caused by the company’s 55% interest in Verizon Wireless.Vodafone, which owns 45% of Verizon Wireless, pays taxes on its share, but the entire profit is reported on income. Adjusting for this, Verizon’s effective tax rate is closer to 30%, the company says. Verizon is buying Vodafone’s stake, which will eliminate the issue in the future. Similarly, real estate investment trusts have low effective tax rates because they pass profit to shareholders, who then pay the taxes.