Abstract: The IRS has released final regs that, among other things, modify the rules for determining the source of income from sales of inventory produced within the United States and sold outside the country (or vice versa). This article describes some notable differences between the final regs and the existing proposed regs they replace.

If you are working with EFPR Group and you are selling inventory produced within the U.S. and sold abroad (or vice versa), rest assured that EFPR is working through these final regulations related to properly sourcing this income. EFPR is also evaluating the impact on possible income tax filings that may now be required outside of the U.S. or how future foreign returns will be impacted.
If you are considering selling inventory produced within the U.S. and sold abroad (or vice versa), be sure to speak with one of the members of the international tax team at EFPR to review all aspects of applicable U.S. tax law.

Final Regs Cover Sourcing Sales of Certain Personal Property

The IRS has released final regs modifying the rules for determining the source of income from sales of inventory produced within the United States and sold outside the country (or vice versa).
The final regs also contain new rules for determining the source of income from sales of personal property, including inventory, by nonresidents that are attributable to an office or other fixed place of business that the nonresident maintains in the United States. And the final regs modify certain rules for determining whether foreign source income is effectively connected with the conduct of a trade or business within the United States.

Highlighted Changes

The final regs adopt existing proposed regs with certain changes. For example, the term “produced” now includes items that are created, fabricated, manufactured, extracted, processed, cured and aged, as determined under the principles of the regulations.

Also, an election to apply the books and records method will now continue until revoked and may not be revoked without IRS consent for any tax year beginning within 48 months of the end of the tax year in which the election was made.

In addition, the final regs include a revision providing that gross income, gain or loss from the sale of personal property treated as from sources within the United States will generally be effectively connected with the conduct of a trade or business in the United States to the extent provided under the tax code. Gross income, gain or loss from the sale of personal property treated as from sources outside the United States isn’t described and, thus, generally won’t be effectively connected with the conduct of a trade or business in the United States.

The determination of the adjusted basis of production assets has been clarified, too. Under the final regs, the adjusted basis of production assets for a tax year is determined by averaging the basis of the assets at the beginning and end of the year, except in the event that a change during the year would cause the average to “materially distort” the calculation for sourcing of income attributable to production activity.

Applicable Dates

The final regs generally apply to tax years ending on or after December 23, 2019. Taxpayers may choose to apply the final regs for any tax year beginning after December 31, 2017, and ending before December 23, 2019, provided that the taxpayer and all persons related to the taxpayer (within the meaning of the tax code) apply the final regs in their entirety. Once applied, the taxpayer and all related persons must continue to apply the final regs in their entirety for all subsequent tax years.

Alternatively, taxpayers may rely on the proposed regs for any tax year beginning after December 31, 2017, and ending on or before “the date of posting on irs.gov,” provided that the taxpayer and all persons related to the taxpayer (within the meaning of the tax code):

• Rely on the proposed regs in their entirety, and
• Haven’t applied the final regs to any preceding year.

If the sourcing of income from sales of inventory produced within the United States and sold outside of the country (or vice versa) may affect your tax liability, contact us to discuss the full ramifications of these final regs.  Interested in receiving these blogs directly to your inbox?  Signup for our newsletter and international tax blogs here!