IC-DISC Presentation

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IC DISC:
Interest Charge Domestic International Sales
Corporation
John Denison
[email protected]
January 19, 2012
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Basics of IC-DISC and Taxes Saved
• IC-DISC starts as Domestic C-Corp
• Its purpose is to assist the exporter with their export sales,
and the DISC is entitled to commission equal to the greater of
• 50% of the export profits or
• 4% of export sales (limited to profits)
• Exporter deducts commission at up to 35% Fed Tax
• DISC pays no Federal income tax on Commission income
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Basics of IC-DISC and Tax Savings (cont.)
• Shareholders of IC-DISC are not taxed until dividends
are distributed
• Individual shareholders are taxed at qualified Dividend
rate of 15%
• IC-DISC History goes back to 1971, but in 1986 FSC
became much more popular, as it was a permanent tax
benefit, and the DISC was conceived as deferral only.
• Deferral: Commissions of up to $10 mio of export sales
every year can accumulate in the IC-DISC and do not
need to be paid out as dividends – thus originally the
IC-DISC was meant as a deferral benefit, but since 2004
the 15% dividend rate is more advantageous
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Calculation Example – Tax Benefits C-Corporation
Qualified Export receipts
Cost of Goods Sold
Gross Margin
5,000,000
(4,000,000)
1,000,000
Selling, General & Admin. Expenses Apportioned
(500,000)
Combined Taxable Income
500,000
Commision Calculation
Greater of:
1)
The Lesser of:
(a)
4% of gross receipts, or
(b)
2 times the amt. Computed under CTI
Lesser of (a) or (b):
2)
200,000
500,000
50% of Combined Taxable Income
1)
200,000
2)
250,000
Greater of 1 or 2 = Commission to IC-DISC
3)
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Tax Savings: Diff 35% Corp. rate
Assuming C-corp paying dividends, thus 15% Div rate irrelevant
4
250,000
35%
87,500
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Who May Be a Good Candidate
• Manufacturers, Distributors, assembler, agriculture producer, software
maker, extractor, engineering/architectural services provider
• Benefit where exports are at least $2 m at decent profits (10% or better) =
$200,000 min export profit = 100k commission = min 20k tax savings
• Exporters often do not realize how much they export, since much of it (or even all of it)
may be indirect through others
• Should be closely held enterprise, but can also be public company
• Savings min 20% of ½ of export profit (see above) for flow-through entity,
as much as 35% for dividend paying C-Corp
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IC-DISC and Qualified Export Property
• Independent of Sec 199 Domestic Production Activities
Deduction – Can take both IC-DISC and Sec 199 benefits
• Possible to “Piggy back” DPAD project – improve DPAD
Qualified Export Property leading to Qualified Export Receipts:
• Manufactured, produced, grown, extracted in US by person other
than IC-DISC
• Held for sale, lease or rental for direct consumption/disposition
outside the US (incl. indirect sales)
• Services related and subsidiary to qualified sale, rental etc
• Architectural & Engineering Services for construction projects
outside US
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What Qualifies as Export Property
Export Property
•
•
•
•
Made, grown extracted etc in US by person other than DISC
Held for sale, lease or rent for use, consumption, disposition outside US
No more than 50% of FMV of product sold attributable to articles imported in the US
Not sold or leased to another IC-DISC in the same controlled group
NOT Export Property
•
•
•
•
•
Patents, trademarks, models, inventions, designs, processes, copyrights, goodwill
Prohibited products per 1979 Export Administration Act
Unprocessed timber which is softwood
Depletable property like oil, gas, coal or uranium
Presidentially decreed property in short supply
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IC-DISC Benefits – Entity Types
• Exporter Flow-through (S-Corp or Partnership/LLC)
• Assuming owners are taxed at 35%, the IC-DISC can turn ordinary income into
Dividend Income at 15% = 20% savings
• IC-DISC owned by individual SHs or Flow-through entity
• Consider IRA or Roth IRA ownership as well
• Exporter Private C-Corp
• C-Corp taxed at 35% max, generally can only pay out add. comp to reduce corp
tax, and esp. in cases of many SHs C-Corp may pay div already. Thus IC-DISC
saves 35% corp tax–Div % same
• IC-DISC should be owned by Exp. SHs – No benefit if owned by exporter C-Corp
(since no beneficial 15% rate)
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IC-DISC Benefits – Entity Types
What IC-DISC benefits for Public Company exporter?
• Exporter C-Corp (US public company)
• C-Corp taxed at 35% max, generally pays dividends.
• Public company usually widely held, thus not practical for IC-DISC to be
owned by SHs -> US public entity best to utilize IC-DISC as a nonqualified compensation plan for executives
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Qualified Export Assets – 95% test
•
•
•
•
•
•
IC-DISC Receivables like commission receivable
Temporary Investments
Producer loans (loaned commission back to exporter)
Stock or securities of related Foreign Export Corp (FISC)
PEFCO Securities
Funds awaiting investment
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Non-Tax Reasons for IC-DISC
Why use an IC-DISC (in addition to the obvious tax benefits)?
• Sale of a company or other succession
• Use DISC to finance the deal – had one client who was officer of
co. purchasing C-Corp stock and was advised to just pay out
bonuses, but why not use IC-DISC benefits?
• Executive Bonus plan
• Could use deferral or just straight out rate differential for
particular person or group of executives as bonus plan
• Estate planning
• Consider gift tax implications under Rev.Rul. 81-54
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IC-DISC Commission Details
1. Identify qualified export receipts – don’t forget indirect sales
2. Track COGS for each export receipt (if possible)
3. Track SG&A:
1.
Direct export expenses – allocable to exports 100%
2.
Indirect export expenses – apportioned based on appropriate methods
4. Identify and eliminate loss transactions
5. Perform full costing and marginal costing calculations
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IC-DISC Implementation Timeline
• NO BENFITS PRIOR TO IC-DISC INCORPORATION
• File SS-4 and incorporate
• File Form 4873-A within 90 days of incorporation
• Decide on owners:
• With C-Corp Exporter, usually C-Corp owners
• With S-Corp/LLC/other Exporter, usually entity
• Can also be IRA – very careful here
• Prepare IC-DISC documents, by-laws, articles of incorp.,
minutes, stock certificates, export sales agreement
• Set up general ledger for IC-DISC and bank account
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Questions
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