USA Law and Practice Contributed by: Devon M Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
Additionally, the USA also has a regime (as modified by the One Big Beautiful Bill Act) that offers domestic corporations a deduction for “foreign-derived deduc - tion eligible income” (FDDEI), which is generally income generated involving intangible assets. How - ever, rather than being a patent box, the deduction for FDDEI is designed to neutralise the effect that CFC Tested Income (see 6.5 Controlled Foreign Corpora- tion-Type Rules ) has to incentivise US corporations to allocate intangible income to controlled foreign cor - porations (CFCs). 2.3 Special Incentives In addition to the R&D tax credit (see 2.2 Technology Investments ), there are several other credits that can provide tax benefits in the form of a dollar-for-dollar reduction to tax liability. For example, there are a vari - ety of general business credits that can be claimed by a broad range of businesses ranging from hiring cer - tain classes of employees (eg, the work opportunity and empowerment zone employment credits) to cred - its for certain types of energy production. Moreover, in any year, a taxpayer can choose whether to take – as a foreign tax credit (FTC) or as a deduction of foreign income – war profits and excess profit taxes paid or accrued during the tax year to any foreign country or US possession. An FTC reduces US income tax liabil - ity dollar for dollar, while a deduction reduces the US income tax liability at the marginal rate of the taxpayer. There are generally limited incentives related to inbound investment at the federal level, such as the portfolio interest exemption (PIE), bank deposit exceptions and trading safe harbours. Very generally, the PIE enables non-residents and foreign corpora - tions to invest in certain obligations in the USA without being subject to US income (or withholding) tax on the interest income (see 4.1 Application of Withholding Taxes ). The bank deposit exception allows non-US investors to deposit funds in US banking institutions without being subject to US tax on the interest earned, provided that the investment meets the statutory defi - nition of a “deposit” and the funds are held by per - sons carrying on a banking business, or certain other supervised institutions. There also are statutory securities- and commodities- trading safe harbours that provide exceptions from
being treated as engaged in a US trade or business for non-US persons trading in stocks, securities or commodities through a resident broker or other agent. Additionally, interest income received on certain quali - fied private activity bonds is generally exempt from US federal income tax, which enables a business to issue the bonds at a lower interest rate. The aforementioned incentives are not intended to represent an exhaustive list of all the benefits that are available; however, they do illustrate some of the core incentives utilised by businesses in a range of industry sectors. 2.4 Loss Relief Under the US tax system, a taxpayer with deductions exceeding gross income can have a net operating loss (NOL) that may be carried to and deducted in another year. The amount of an NOL is equal to the taxpayer’s gross income minus deductions, computed with cer - tain modifications. The modifications that must be made depend on whether the taxpayer is a corpo - rate or non-corporate taxpayer. In addition, special rules apply when determining the NOLs of a group of corporations filing a US consolidated return, which require NOLs to be computed on a consolidated basis (see 2.6 Consolidated Tax Grouping ). For NOLs arising in tax years that begin after 2020, there is no longer a carry-back period, except a two- year carry-back for certain NOLs attributable to farm - ing losses and NOLs incurred by non-life insurance companies. The carry-forward period is unlimited for NOLs arising in post-2017 tax years; however, a 20-year carry-forward period applies to the NOLs of non-life insurance companies and pre-2018 NOLs. In addition, post-2017 NOLs may only offset 80% of taxable income; however, this 80% limitation does not apply to non-life insurance companies. Apart from the 80% limitation, certain anti-loss trafficking rules may limit a company’s NOL utilisation where there has been a sufficient change of ownership. Individual taxpayers may offset capital gains with capital losses and, if such losses exceed the gains, ordinary income up to USD3,000 per year. Individuals may carry unused capital losses forward indefinitely.
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