IC-DISC:An Export Tax IncentiveSarah Anderson

January 28, 2010

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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

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

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

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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%

IC-DISC (common ownership with exporter, i.e. S Corp Structure)

Owner of US Exporter

US Exporter

Customers

IC-DISC

Dividend Taxed at 15%

Services

Commission Payment

Export Sales

IC-DISC (different ownership, i.e. C Corp Structure)

Manager/Family Members

US Exporter

Customers

IC-DISCServices

Commission Payment

Export Sales

Dividend taxed at 15%

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

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

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.

Selecting the Best CalculationMaximization 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

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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

#’s in 000’s No IC-DISC With IC-DISC

Domestic Export Total Domestic Export Total

Sales 5,200 1,500 6,700 5,200 1,500 6,700

Taxable Income Before Commissions 520 150 670 520 150 670

Commission 0 0 0 0 75 75

Net Taxable Income 520 150 670 520 75 595

S/H Level Tax – 35% 182 52.5 234.5 182 26.25 208.25

Distribution from IC-DISC 0 0 0 0 75 75

Tax on IC-DISC Dist – 15% 11.25 11.25

Total Tax 182 52.5 234.5 182 37.5 219.5

Example Using 50% Export Taxable Income Method

IC-DISC Tax Savings

Total TaxW/O IC-DISC 234.5W/ IC-DISC 219.5Tax Savings 15

Commission Exp 75Tax Rate Reduction 20%Tax Savings 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.

Commission Payment Example

During the Year

1/1/10-2/28/10

3/1/10-5/31/10

6/1/10-9/15/10

Total Commissions

A Pay 50% 1,000,000 4,000,000 5,000,000 0 10,000,000

B Pay 60% 1,000,000 5,000,000 4,000,000 2,000,000 12,000,000

C Pay 70% 1,000,000 6,000,000 3,000,000 4,000,000 14,000,000

For a Calendar Year TaxpayerTotal Commissions = $10,000,000 Calculated at 12/31/09Found 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%)

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.

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

Deferral Limit Calculation

Product #1 Product #2 Product #3Total /

AverageExport Sales 10,000,0000 10,000,000 10,000,000 30,000,000

Net Profit % 3.0% 8.0% 10.0% 7.0%

Taxable Net Income 300,000 800,000 1,000,000 2,100,000

4% Gross Receipts Method 400,000 400,000 400,000 400,000

50% CTI Method 150,000 400,000 500,000 350,000

Greater of 4% or 50% 400,000 400,000 500,000 400,000

Product #3 is the best option for the deferral because it allows for $500,000 to be deferred in the IC-DISC.

§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.

Future Considerations

• What is the qualified dividend rate going to be?

• What is the highest tax rate going to be?

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

Thank You & Additional Questions

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