2. 2 IC-DISC Overview Interest Charged Domestic International Sales Corporation A tax savings device provided for under the US Internal Revenue Code that is available to small and mid-sized companies engaged in exporting US manufactured products
3. Details of an IC-DISC U.S. corporation Single class of stock Minimum par value of $2,500 IC-DISC election must be made within 90 days of the beginning of the tax year Files a Form 1120-IC-DISC (there is no extension – due 8.5 months after year-end) 95% or more qualified export receipts 95% or more qualified export assets Interest charge on deferred income IC-DISC is a paper company
4. Who Should be the Owner of an IC-DISC? If the exporter is a C Corporation owned by individuals the individuals should own the IC-DISC directly If the exporter is an S Corporation owned by individuals the S Corporation should own the IC-DISC directly. The year-end of the IC-DISC is the year-end of its majority shareholder
5. 5 The IC-DISC Tax Benefit Have the exporter and the IC-DISC enter into a sales agent agreement Exporter pays a deductible commission to the IC-DISC, thereby transferring income to the IC-DISC that would have taxed at a 35% rate (assuming highest rate) IC-DISC does not pay tax, but makes distributions to the owners which are taxed at 15% capital gains rate Effectively saving the exporter 20%
6. IC-DISC (common ownership with exporter, i.e. S Corp Structure) Owner of US Exporter Dividend Taxed at 15% US Exporter IC-DISC Commission Payment Services Export Sales Customers
7. IC-DISC (different ownership, i.e. C Corp Structure) Manager/Family Members Dividend taxed at 15% US Exporter IC-DISC Commission Payment Services Export Sales Customers
8. Good Candidate: Exporter of US- manufactured products with > 50% US content Engineers and architects with construction projects outside the US Profitable in the US S-Corps, LLCs, and privately-held C-Corps Export Receipts > $2 million
9. What Type of Export Property Qualifies? U.S. Exporter must sell or lease qualified export property that: is manufactured, produced, grown or extracted in the U.S. by a person other than an IC-DISC is held primarily for sale, lease or rental for direct use, consumption or disposition outside the U.S. contains a minimum of 50% U.S. content exported within a year of sale start counting exports when the IC-DISC is incorporated exports qualify if they are shipped in that year
10. How is the Commission Expense Calculated? Methods: 4% of Export Gross Receipts 50% of Net Taxable Export Income (CTI Method) Can pick and choose which exports sales are included in the calculation, i.e. if using the 50% method remove all loss export sales to increase to total Allocation method of SG&A expenses is very flexible. Method just needs to be reasonable. Can be calculated on a transaction by transaction basis.
11. Selecting the Best Calculation Maximization Tips: 50% CTI if net profit is > 8% 4% Gross Receipts if net profit is < 8% Transactional method is the most beneficial In addition – selective grouping is needed for maximization Good Candidate for the “T by T” Approach: Profit Variability (Product, Customers, Time of Yr., etc.) Available Sales & COGS by Transaction 11
12. Case Study - Facts S Corporation that manufactures and exports is the owner of the IC-DISC Interested in dividends (not deferral) 12/31 year-end Profitable
15. When to Pay the Commissions? Commissions can be paid at any point during the year and up to 8.5 months after. After the close of the tax year the exporter has 60 days to pay the remaining commissions needed to get to at least 50% of the commission payments for the year. (Recommend to pay at least 65-75%) Then within the next 90 days the exporter must pay in the remaining portion However, if additional qualified export receipts are found after the 60 & 90 day marks their related commissions must be paid in within 90 days of discovery. The process of discovery can continue until the earlier of 9/15 or the filing date of the IC-DISC return.
16. Commission Payment Example For a Calendar Year Taxpayer Total Commissions = $10,000,000 Calculated at 12/31/09 Found additional $4,000,000 on 6/30/2010 A – Since $5,000,000 was paid in within 60 days of YE the maximum commission payment for the year is $10,000,0000 ($5,000,000 / 50%) C – Since $7,000,000 was paid in within 60 days of YE the maximum commission payment for the year is $14,000,0000 ($7,000,000 / 50%)
17. Timing of Deduction and Income Commission Expense is deductible for the year which the related product was exported, even if the commission expense is paid after year-end. Qualified Dividend Income is picked up in income when received, on a cash basis.
18. Distribution vs. Deferral Distribution: Commission income is taxed at 15% when distributed Deferral: Calculated based off the income derived from $10 million of export sales Interest is charge on the deferred amount at a rate imposed by the IRS. Currently .63% (as of September 30, 2009) No limit on the length of time Deferred funds can be loaned back to the U.S. Exporter using producer’s or accounts receivable loans
19. Deferral Limit Calculation Product #3 is the best option for the deferral because it allows for $500,000 to be deferred in the IC-DISC.
20. §199 & IC-DISC §199 – Domestic Production Activities Deduction, based on qualified US manufacturing, production and construction. §199 is calculated in conjunction with the IC-DISC. The §199 calculation may be done before or after the commissions calculation. Clients which benefit from the IC-DISC most likely will also benefit from §199.
21. Future Considerations What is the qualified dividend rate going to be? What is the highest tax rate going to be?
22. Exporter Costs First Year Cost = ~$18,000 Subsequent Year Costs = ~$10,000 - $12,000 Amper partners with Export Assist which handles the “back office” work and assists with questions regarding the IC-DISC mechanics
