If you are a US based company, you are exporting (directly or indirectly) and you haven't looked at creating an IC-DISC, now is the time to do so. Attached is a presentation Michael Beringer and I recently gave at Hancock Bank in Pensacola.

1. HANCOCK BANK
PRESENTS:
THE IC-DISC
Max Koss, CPA
International Tax Director - Warren Averett, LLC
Michael Beringer, CPA
Tax Member - Warren Averett, LLC
February 4, 2016

2. 1. General concept
2. A brief history
3. Structuring
4. IRS requirements
5. Calculation of commission
6. FAQs
The IC-DISC
TOPICS FOR DISCUSSION

3. • Tax deduction for exporter at effective rate
• Max 40% excluding state tax
• Dividend income to DISC owner @ 20% (+3.8% NIIT)
• Tax savings of approximately 16 percentage points
• This is not a tax shelter, not a “grey” area, it is an export tax incentive put
into the tax code by Congress
The IC-DISC
GENERAL CONCEPT

4. • Original DISC concept was enacted in early 70s
• Congress intended to create a tax regime to promote exports and help
U.S. companies compete in the global market
• An interest charge was added to appease trade partners
- and -
• After various successful legal challenges to the rules as illegal export
subsidies, repeals of laws, enactments of replacement legislation, etc.
DISC and IC-DISC (1971‐1984), FSC (1984‐1999), ETI Exclusion (2000‐2006)
• The IC-DISC is back, mostly due to the difference in the tax rates on
ordinary income and dividends and capital gains.
The IC-DISC
BRIEF HISTORY

5. The IC-DISC
DISC STRUCTURES
U.S. Exporter
(Corp, LLC or Pshp)
DISC U.S. Exporter
(Corp, LLC or Pshp)
DISC
IRA

6. The IC-DISC
DISC STRUCTURES
U.S. Exporter
(S corp, LLC or Pshp)
DISC

7. The IC-DISC
DISC STRUCTURES: ADD-ON TAX DEFERRAL
U.S. Exporter
(S corp, LLC or Pshp)
DISC
Commission paid
and deducted
Loan to Parent (interest charged
by IRS) on Tax normally due –
Exporter pays interest on loan

8. • Must be a U.S. corporation
• Must make an election to be an IC-DISC
• Must have minimum capital of $2,500
• Must have single class of voting stock
• Separate bank account – not required, but suggested
• 95% qualified export asset test
• Interest charge on deferred income (if any)
• 95% qualified gross receipts test
The IC-DISC
DISC REQUIREMENTS

9. Greater of:
• 50% of profits; or
• 4% of gross receipts
on exports of products which are manufactured, grown, or extracted in the
U.S. by a person other than a DISC:
1. Held primarily for sale, lease, or rental for direct use, consumption,
or disposition outside the U.S.; and
2. Up to 50% of the FMV of the export property can be attributed to
foreign content.
The IC-DISC
COMMISSION CALCULATION

10. The IC-DISC
COMMISSION (1)
Total Exports
Sales Revenue 10,000,000 (1) 1,500,000
COGS (6,000,000) (2) (900,000)
Gross Margin 4,000,000 600,000
Operating Expenses (1,500,000) (3) (225,000)
Exps Definitely Related to Exports (25,000) (25,000)
Exps Definitely NOT Related to Exports (275,000) 0
Total Expenses (1,800,000) (250,000)
Taxable Income 2,200,000 350,000
(1) Actual Export Sales
(2) Actual COGS or allocation based on relative revenue
(3) Apportioned to export sales based on relative gross margin

11. The IC-DISC
COMMISSION (2)
Commission:
4% of Gross Export Receipts 1,500,000 x 4% = $60,000
50% of Export Profits 350,000 x 50% = $175,000
Tax @ 40%
Taxable Income Before DISC $2,200,000 $880,000
Taxable Income net of DISC Commission
2,025,000 (810,000)
23.8% Tax on DISC Dividend (41,650)
Savings (16.2% x
$175,000)
$28,350

12. • “Exported” goods (directly or indirectly exported), including Canada and
Mexico
• U.S. content (no more than 50% of sales price can be foreign content)
• U.S. manufactured goods (20% of COGS U.S. labor/burden safe harbor)
• Products must not be further manufactured within the U.S. by another
party (further manufacture outside the U.S generally qualifies) after the
sale
• Certain services and leases (Related, Subsidiary, Architectural and
Engineering)
• All manufacturing, growing, distribution, extraction, and architectural/
engineering firms should be thoroughly examined, even if they do not think
of themselves as manufacturers or exporters.
The IC-DISC
PRODUCTS OR SERVICES THAT QUALIFY

13. • “Ultimate Use” Sales
• Sales to Related Party
(and by related party in some cases)
• Simplified Calculations
• Distributor Sales
• Certain Services
• Software Companies
• Distributors/Brokers
• Food Growers
• Food Processors
• Equipment Leasing
• Recyclers
• Architectural/Engineering
• Timber
(unprocessed softwood does not qualify)
The IC-DISC
OVERLOOKED TRANSACTIONS & INDUSTRIES

14. • $10 Million maximum export sales
• Minimum export revenue required
• Taxpayer must manufacture products
• Aggressive/tax shelter
• Business operations disrupted/administrative burden
• 4% of export sales or 50% of overall export profit is maximum commission
• IC‐DISC benefits for foreign owners endorsed by tax code
The IC-DISC
COMMON MISCONCEPTIONS

15. • What is the minimum amount of export sales needed for an IC-DISC?
• How can I figure out if I would benefit from this?
• Do I have to be the exporter of the goods?
• Do I have to be the manufacturer of the goods?
• What if I have a current operating loss or loss carryforwards?
The IC-DISC
FREQUENTLY ASKED QUESTIONS

16. QUESTIONS?
COMMENTS?
Max Koss, CPA
International Tax Director - Warren Averett, LLC
max.koss@warrenaverett.com
Michael Beringer, CPA
Tax Member - Warren Averett, LLC
michael.beringer@warrenaverett.com