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IC-DISC for the Agriculture Industry

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Description of the structure of a Domestic International Sales Corporation or IC-DISC for the Agriculture Industry.

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IC-DISC for the Agriculture Industry

  1. 1. Domestic International Sales Corporation (IC-DISC) Agriculture Industry
  2. 2. Domestic International Sales Corporation (IC-DISC) Who Can Benefit?  Growers  Farmers  Processors  Suppliers  Cooperatives and others associated with agriculture  IC-DISC is available even if your company is not the ultimate producer or exporter of the goods or services.
  3. 3. Common IC-DISC Structure (without cooperatives) Farmers IC-DISC without Cooperatives Operating Company (S Corporation) IC-DISC (C Corporation) Foreign Customer Deductible Commission (Offset income taxed at 39.6%) Qualified Dividend (Taxed at 15% -23.8%)
  4. 4. Tax Benefit of IC-DISC  Tax Consequence  No federal level tax on the DISC.  Tax deferred until income is distributed (but regularly distributions often necessary).  Shareholders pay interest on the deferred income.  Tax Arbitrage  Convert ordinary income into qualified dividend taxed at preferential rates when distributing to shareholders.
  5. 5. Setting up the IC-DISC  Form a US C corporation ‒ Only have one class of stock ‒ Choose an IC-DISC friendly State  Electing IC-DISC Treatment ‒ Form 4876-A must be filed with the IRS within 90 days of the beginning of the IC-DISC’s taxable year for the election to apply to such year.  Entering into a Commission Agreement ‒ The permitted commission rate is set by statute, and is generally limited to the greater of:  4% of the exporter’s qualified export receipts, subject to certain limitations; or  50% of the exporter’s taxable income attributable to qualified export receipts.
  6. 6. Maintaining the IC-DISC Status  95% qualified gross receipts test ‒ I.R.C. §993(a)  95% qualified export asset test ‒ I.R.C. §993(c)(1)(B) ‒ REV. RUL. 77-484, 1977-2 C.B. 289  $2,500 capital at all times  Timely payment of commissions  Annual Filings  Books and Records
  7. 7. Challenges for IC-DISC with Cooperative Entities Farmers Operating Company (S Corporation) IC-DISC (C Corporation) Foreign Customer Deductible Commission (Offset income taxed at 39.6%) Qualified Dividend (Taxed at 15% -23.8%) Model A Cooperative Entity Domestic Customer Profits Products REV. RUL. 77-484 • IC-DISC failed the destination test for “qualified export sales” if the product is commingled with other fungible product acquired by the cooperative from other farmers, and cannot be traced to the export sale. • The IRS IC-DISC Audit Guide suggests that the destination test can be satisfied if the cooperative set up systems for segregation under the FSC regulations.
  8. 8. Challenges for IC-DISC with Cooperative Entities Farmers IC-DISC (C Corporation) Foreign Customer Deductible Commission (Offset income taxed at 39.6%) Qualified Dividend (Taxed at 15% -23.8%) Cooperative Entity Qualified Export Sales Model B Domestic Customer  Uncertainty created by Subchapter T of the I.R.C • Cooperatives are allowed deductions for certain distributions to its members. • It is unclear if the “combined taxable income” upon which the commission is determined would take into account the deductions.  Farmers have two stream of taxable income • One from the cooperative. • One from the partnership. • It adds complexity to the tax accounting treatment for the two revenue streams. Partnership
  9. 9. PALO ALTO 1717 Embarcadero Road Palo Alto, CA 94303 LOS ANGELES 11150 Santa Monica Blvd. Suite 1200 Los Angeles, CA 90025 SAN FRANCISCO 135 Main Street 12th Floor San Francisco, CA 94105 Palo Alto Office: 650-813-9700 CONTACT US www.rroyselaw.co m @RoyseLaw MENLO PARK 149 Commonwealth Drive, Suite 1001 Menlo Park, CA 94025 LOS ANGELES 445 S Figueroa St 31st Floor Los Angeles, CA 90071 SAN FRANCISCO 135 Main Street 12th Floor San Francisco, CA 94105 Menlo Park Office: 650-813-9700 CONTACT US www.rroyselaw.com @RoyseLaw

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