Income from the sale of inventory by a domestic corporation generally is sourced based on where title and risk of loss to the property pass to the buyer. Thus, income from the sale of inventory where title passes outside the United States (e.g., at a foreign port) generally would be foreign source income. Source is important because if the sales income is foreign source, the US tax on it generally can be reduced by excess foreign tax credits on other business income in the same foreign tax credit basket. 

If a domestic corporation manufactures inventory in the United States and passes title and risk of loss outside the United States, prior law provided that 50 percent of the income would be US source (based on the location of manufacture) and 50 percent would be foreign source (based on where title passes). The 2017 tax reform legislation modified this rule to provide that 100 percent of the income from the sale of property manufactured by the corporation in the United States is US source, regardless of where title passes. 

On the other hand, if the domestic corporation manufactures the inventory outside the United States, 100 percent of the income from the sale would be foreign source, regardless of where title passes and regardless of whether the products are sold to US or foreign customers. If instead the domestic corporation purchases the inventory it sells, the sales income would be sourced based on where title and risk of loss pass to the buyer. 

Because of the relatively low 21 percent corporate tax rate after tax reform, foreign tax credit planning has increased in importance. Thus, a domestic taxpayer should review its supply chain and consider options for increasing its foreign source income. 

One final note: the income from sales of inventory to foreign customers generally should be eligible for the 13.125 percent tax rate applicable to foreign-derived intangible income, regardless of whether the income is US source or foreign source. US tax can be reduced with foreign tax credits to the extent the income is foreign source.