Understanding IC-DISC Tax Benefits - Boston Massachusetts Accounting Firm

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AN OVERLOOKED TAX BREAK THAT COULD BE YOUR BIG BREAK

THE IC-DISC

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President Obamas pledge to cut tax benefits on income generated overseas sent waves of anxiety through the manufacturing community in 2009. Even though at press time the tax proposal seems to be on the back burner (presumably because of a large lobbying push against the proposal by the business community), the announcement sparked increased interest in interest chargedomestic international sales corporations (ICDISCs). By forming an IC-DISC, your manufacturing company may realize substantial tax savings on export-sales income. IC-DISC FREQUENTLY ASKED QUESTIONS What is an IC-DISC How an IC-DISC Works Are IC-DISC Tax Beneift Temporary or Permanent Other Benefits of an IC-DISC Are IC-DISC Tax Benefits Retroactive Executive Summary Find out how our Boston Massachusetts manufacturing accountants can add value to your business. Email us or call us at 1 (888) 875-9770. WHAT IS AN IC-DISC? An IC-DISC is a tax-exempt, domestic paper corporation set up to receive commissions on your companys export sales. It must have its own bank account, keep separate accounting records and file U.S. tax returns. But it need not have an office, employees or tangible assets nor is it required to perform any services. An IC-DISC reduces your tax liability by converting a portion of your export income, which is taxable at ordinary income rates as high as 35% into qualified dividends generally taxed at 15%. TO QUALIFY AS AN IC-DISC, A CORPORATION MUST: 1. Be incorporated in one of the 50 states or District of Columbia 2. File an election with the IRS to be treated as an IC-DISC for federal tax purposes 3. Maintain a minimum capitalization of $2,500 4. Have a single class of stock 5. Meet a qualified export receipts test and a qualified export assets test Meeting a qualified export receipts test and a qualified export assets test indicates that at least 95% of an IC-DISCs gross receipts and assets must be related to the export of property whose value is at least 50% attributable to U.S.-produced content. Engineering and architectural services related to construction projects outside the U.S. may also generate qualified export receipts. Back to top HOW AN IC-DISC WORKS 1. Owner-managed exporting company qualifies for and creates a tax-exempt ICDISC 2. Exporting company pays IC-DISC a commission

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Understanding IC-DISC Tax Benefits - Boston Massachusetts Accounting Firm

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3. Exporting company deducts commission from ordinary income taxed at 35 percent 4. IC-DISC pays no tax on the commission 5. Shareholders of an IC-DISC must pay income tax on dividends at a qualified rate of 15 percent 6. Result is 20 percent tax savings on commission

Back to top TEMPORARY AND PERMANENT TAX BENEFITS OF AN IC-DISC The implementation of an IC-DISC can result in both temporary and permanent tax benefits. An IC-DISC can provide temporary tax benefits to a U.S. exporter by permitting the U.S. exporter to defer the taxation of up to ten million dollars of qualified export receipts until those receipts are distributed to the IC-DISC's shareholders. The IC-DISC shareholders are required to pay only a nominal interest charge to the IRS with respect to taxes that are deferred on the IC-DISC's income. A U.S. exporter that is a closely-held C-corporation can use an IC-DISC to obtain a permanent tax benefit in the form of a tax deduction for the U.S exporter's commission payments to the IC-DISC. Those commissions can then be distributed by the IC-DISC to its shareholders as a dividend. As such, an IC-DISC can be an effective tool for getting cash to the shareholders of a closely-held C-corporation free from the corporate "double tax." This strategy can augment or potentially replace non-deductible C-corporation distributions. For a U.S. exporter that is a flow-through entity such as an S-corporation or an LLC, the permanent tax benefit is obtained by using the IC-DISC to convert a portion of the U.S. exporter's ordinary income into qualified dividend income. This can result in a 20% tax savings on qualified export receipts, which is the difference between the 35% top marginal tax rate for "ordinary income" and the 15% rate for "qualified dividend income." For a detailed illustration of how an IC-DISC can impact your tax liability, click here Back to top OTHER BENEFITS OF AN IC-DISC Although an IC-DISC isnt required to perform any services, having it do so may enhance its benefits. Services might include promoting your companys export activities or purchasing receivables from your company at a discount (factoring). Just like

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commissions, income from these services can be distributed to shareholders at the qualified dividend tax rate. It is possible to use an IC-DISC as an estate planning tool. There is no requirement that states an IC-DISCs shareholders has to be the same as the exporters shareholders or that they own their shares in the same proportions. By giving IC-DISC shares to your children or other family members, you may be able to shift some of the income so it will be taxed at the 0% qualified dividend rate which through 2012 applies to taxpayers in the two lowest ordinary-income tax brackets. (Bear in mind that there may be gift tax implications. But with the gift tax exemption at $5 million for 2011 and 2012, this may be less of a concern. Also, beware of the kiddie tax.) Finally, you can defer tax on up to $10 million per year in commissions that are left in the IC-DISC by making modest interest payments to the IRS. These interest charges (the IC in IC-DISC) are tied to Treasury bill rates, which, in recent months, have been only a fraction of 1%. Back to top ACT NOW FOR IC-DISC TAX BENEIFTS An IC-DISCs tax benefits are not retroactive in other words, these benefits are available only for export sales made after the IC-DISC is established. With the 15% qualified dividend rate set to expire at the end of 2012, the sooner you act, the greater your tax savings. If this favorable rate does expire, dividends will once again be taxed as ordinary income, eliminating the IC-DISCs ability to reduce your tax rate. Back to top

IC-DISC- PERMANENT TAX SAVINGS FOR CLOSELY HELD EXPORTERS IC-DISC Procedure 1. Exporting company and shareholders create a new entity, which will elect an IC-DISC treatment 2. Exporting company and IC-DISC entity execute a commission agreement 3. Exporting company pays IC-DISC a commission on export sales 4. Exporting company deducts the commission 5. Commission income of IC-DISC is not taxed 6. IC-DISC can pay a dividend in current or future tax year 7. IC-DISC dividend is typically a qualified dividend, taxed at 15% Back to top ANNUAL PERMANENT TAX SAVINGS AND MORE: ANNUAL CALCULATION TO DETERMINE IC-DISC COMMISSION RESULTS IN: Recurring permanent tax savings for shareholders Typically high benefits relative to costs Deferral mechanism when earnings are not distributed out of IC-DISC Ability to tax efficiently manage cash flow needs of exporting company Potential retirement planning flexibility Analysis of allocation and apportionment methodologies Multi-dimensional profitability analysis useful in business review

EXECUTIVE SUMMARY FOR IC-DISCS

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Transactional taxable income calculation, reconciling tax return data to financial information Transparent work paper trail CAN YOUR COMPANY BENEFIT WITH AN IC-DISC? Do you export U.S. manufactured goods? Do distributors export your U.S. manufactured goods? If you answered yes to either of the following questions, you should be enjoying sustainable tax savings on export sales. IMPLEMENTATION OF AN IC-DISC Customers and operations are not affected Easy access to non-disruptive, utilizing data Highly experienced engagement teams who work both on and off-site Efficient process produces accurate, timely results for inclusion in tax return filing Back to top Share this:

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