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Ic disc exec summary 6 13


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Ic disc exec summary 6 13

  1. 1. “IC-DISC” Export Tax Incentive Presented by: Mary Anne McElmurray, CPA Brown Edwards & Company, LLP June 20, 2013
  2. 2. What is the “IC-DISC” Export Tax Incentive? • IC-DISC: “Interest Charge – Domestic International Sales Corporation” • A tax incentive to export U.S.-sourced products • Provides an immediate U.S. tax benefit on export-related income • Taxpayers can gain a permanent tax savings from rate arbitrage. [Large co's can also use the IC-DISC structure for an indefinite deferral of tax and pay interest on the tax deferral, hence the IC in the name]. • Rate arbitrage benefit comes from the difference in the tax deduction [ordinary tax rate]—and the dividend income pick up [at either the 15 or 20% preferential rate on dividend income]
  3. 3. Potential IC-DISC Structures C Corp “Exporter” (Related Supplier) IC-DISC Shareholders S Corp/LLC “Exporter” (Related Supplier) IC-DISC Shareholders
  4. 4. How Does the IC-DISC Work? • Related entities: aka the Supplier and the IC-DISC • Supplier makes sales of “qualified export property” to the IC-DISC – Defined as: U.S. goods destined for ultimate use or consumption outside U.S. • Supplier: “pays” deductible commission to IC-DISC as a “deemed brokerage fee” for supporting the export sales – Supplier determines export taxable income for IC-DISC purposes. There are several options in making the taxable income calculation including a 4% of qualified receipts “safe harbor” – Supplier’s tax deduction [max.] is at @ 34% [C corp.] or 39.6% [S corp.]
  5. 5. • IC-DISC receives the commission income – Is a non-taxable entity for Federal tax purposes – Passes through commission income to owners, which is taxed as dividend income • Permanent tax benefit when IC-DISC pays dividends – The dividend from an IC-DISC AT PRESENT is qualified dividend income for the preferential dividend tax rate for individual taxpayers – Shareholder(s) pay tax on IC-DISC dividends at 15 or 20% dividend tax rate 10
  6. 6. Example Using Brother Sister Structure for Supplier & IC-DISC 6
  7. 7. • Betsy Ross, a U.S. citizen owns 100% of FLAGco, an S corporation for U.S. tax purposes. • FLAGco makes qualifying export sales of $6 million of low-margin flags to its sister company, an IC-DISC. • FLAGco will deduct a commission paid of $240,000, resulting in a U.S. tax reduction of $95,040 using the 4% of qualified export receipts method of calculating IC DISC taxable income: $6M X 4%= $240,000 39.6% X $240,000=$95,040 • The IC-DISC distributes the $240,000 cash representing this income as a dividend to Betsy Ross. Ross pays U.S. tax of $48,000: $240,000 x 20%= $48,000 • The arbitrage impact of the 4% of qualified gross receipts method of computing the IC-DISC income combined with the 20% preferential tax rate is $47,040: $95,040-$48,000= $47,040 • The tax savings would be greater if FLAGco were a C corporation because the earnings representing the commission would still be in C solution. 7 Example Using Brother Sister Structure for Supplier & IC-DISC
  8. 8. “IC-DISC” Export Tax Incentive Mary Anne M. McElmurray, CPA Tax Director Brown, Edwards & Company, L.L.P. 319 McClanahan Street, S.W., Roanoke, Virginia 24014 Roanoke Office: (540) 345-0936 ext 1024 Fax: (540) 342-6181 NRV Office: (540) 381-9333 Fax: (540) 381-8319 Notification as required by the Standards of Tax Practice: The information provided herein is not intended or written to be used, and cannot be used by you or any other person or entity for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or any applicable state or local tax law.