One consideration to remember is that the IC-DISC must be incorporated before any tax savings can be realized. Once the IC-DISC is incorporated, the tax savings can be realized by your client from that day forward. There are many filing requirements as well as many additional and complex methods to compute the commission paid to the IC-DISC and maximize the overall tax savings, but an experienced international tax professional that has the expertise in this onerous area of taxation and the necessary resources can assist you in realizing the most federal tax savings from an IC-DISC. Without exception, the cost of implementation, maintenance and transaction optimization of an IC-DISC is minimal in comparison to the tremendous federal tax savings available to your exporting clients. This is the one boat you cannot afford to miss.
Distributor Sales: An IC-DISC Opportunity Frequently Overlooked
Sales by a United States manufacturer that are delivered outside of the United States will qualify for IC-DISC benefits. However, many exporting companies fail to recognize one of the most overlooked of their IC-DISC qualified sales known as distributor sales. Here is an example of an IC-DISC qualified distributor sale:
A manufacturer within the United States builds a machine that is sold to a dealer or distributor located in the United States. After title transfers to the distributor, the distributor then sells the machine to a customer in Canada. In this case, both the manufacturer and the distributor have an IC-DISC qualified sales. Both the manufacturer and the distributor must calculate their IC-DISC benefit separately.
One area of caution is that the machine cannot return to the United States. Also, certain documentation requirements are necessary to validate distributor sales. Export Tax Management successfully captures distributor sales for many of its clients as well as assists our clients with the proper documentation to substantiate the distributor sales. This is an area of benefit that should never be overlooked.
ETM featured by Massachusetts Society of CPA’s
Following is a reprint of an article Paul Ferreira, CPA (president and founder of Export Tax Management) authored for the Massachusetts Society of CPA’s SumNews.
On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (P.L. 111-312). This landmark legislation provides certainty for the IC-DISC through 2011 and 2012. Many privately-held companies that have products delivered to customers outside of the United States, including Canada and Mexico, are significantly reducing their federal income taxes related to their export sales. The growing demand for U.S. products in emerging foreign markets such as China and India have driven the demand for U.S. products to an all-time high and every exporter needs to have an IC-DISC in place. If your exporting clients do not have an IC-DISC, you are missing the boat on a tremendous opportunity to reduce your clients federal income tax burden every year.
The IC-DISC was introduced by the Nixon administration in 1971. The main legislative purpose was to encourage U.S. companies to remain in the United States and export their products abroad and to discourage U.S. companies from relocating overseas where labor was available at a much lower cost. This same federal tax benefit exists today for all privately-held exporters. Although much controversy has erupted over export subsidies in the past, the World Trade Organization, European Union or other trade organizations never challenged the IC-DISC. Moreover, the Obama administration favors the IC-DISC and this substantial tax savings incentive may be here for a very long time. As the current administration is working to keep as many jobs in the United States and avoid a further mass exodus to foreign markets, they recognize the IC-DISC as the predominant vehicle to allow privately-held companies to be competitive in foreign markets while remaining in the United States and employing U.S. workers today and in the years to come. The current administration is working diligently to create and keep jobs in the United States, and past legislation has proven that they truly recognize the IC-DISC as the most powerful federal tax incentive to meet these needs.
The IC-DISC is a separate corporation from the exporting company; however, the IC-DISC does not pay any federal income tax. It is a domestic corporation that elects to be an IC-DISC, and as such is not taxed on its income. The shareholders of the IC-DISC are taxed when the income is distributed. The exporting company pays a commission to the IC-DISC that will result in a 35% deduction for the exporting company. The IC-DISC then pays qualified dividends to the shareholders that are taxable at 15%. The net result is a 20% federal tax savings. Although the IC-DISC is a separate company, it merely receives a commission and pays dividends. The IC-DISC performs no other function and will never interrupt the normal course of business for your exporting clients.
The commission that is paid by the exporting company to the IC-DISC is determined by the Intercompany Pricing Rules set forth under IRC §994. Basically, the commission is 4% of export sales or 50% of the net taxable income from export sales. However, there is a further tax savings opportunity available to exporters. The Internal Revenue Code allows an exporting company to calculate the commission paid to their IC-DISC at the transaction or invoice level. For example, a scrap metal exporter may have some export transactions that are very low margin, such as scrap iron and also higher margin export sales, such as zinc or copper, in the same year. The greatest commission for these low margin transactions would be realized by employing the 4% of export sales method. In addition, the high margin export sales such as zinc or copper would yield the greatest commission by utilizing the 50% of net taxable income method. An exporter may use the 4% of export sales method on low margin transactions and 50% of net income method on the other higher margin transactions in the same year.
The Internal Revenue Code allows the exporter to chose the method for each transaction that produces the greatest tax savings overall. A transaction optimization can significantly increase the commission paid to the IC-DISC. Many exporters have thousands of export transactions, and a combination of international tax expertise and sophisticated IC-DISC transaction optimization software can realize the most optimal federal tax savings. In almost every case, the cost is minimal in comparison to the federal tax savings generated by performing a thorough transaction optimization.
One consideration to remember is that the IC-DISC must be incorporated before any tax savings can be realized. Once the IC-DISC is incorporated, the tax savings can be realized by your client from that day forward. There are many filing requirements as well as many additional and complex methods to compute the commission paid to the IC-DISC and maximize the overall tax savings, but an experienced international tax professional that has the expertise in this onerous area of taxation and the necessary resources can assist you in realizing the most federal tax savings from an IC-DISC. Without exception, the cost of implementation, maintenance and transaction optimization of an IC-DISC is minimal in comparison to the tremendous federal tax savings available to your exporting clients. This is the one boat your clients cannot afford to miss.
While the IC-DISC has been around for a long time, small business owners and tax professionals still struggle with understanding how an IC-DISC works and how to maximize its value. Today I thought we should look at the some of the concerns and myths surrounding this tax incentive that has been in place since 1971.
IC-DISC Myth #1 – Only Direct Sales Qualify
Qualified sales made by a privately-held US company qualify when they are delivered outside the US. This is true regardless of whether or not the company that manufactured the products (or provided the services) transferred the products to a distributor who then sold them outside the US. As long as the products were delivered outside the US within one year of the original sales, the sale will qualify.
IC-DISC Myth #2 – IC DISC is an off-shore Tax Strategy
An IC-DISC is a privately-held US corporation that elects IC-DISC status. This incentive has been in place since 1971 to provide an incentive to US companies to broaden their market by exporting products and services outside the US. It is not a tax strategy and does NOT involve either setting up an off-shore entity or moving assets off-shore.
IC-DISC Myth #3 – An IC DISC only works for large companies
IC-DISCs work regardless of entity size. We have clients that ship less than $1 million in goods and services outside the US and generate a significant tax savings each year that helps them grow their business. For a small business that is in the process of taking the next step in terms of growth and market reach, the IC-DISC can be a game changer and make them more competitive on the global stage.
IC-DISC Myth #4 – An IC DISC is too much trouble to set up and administer
There are a number of requirements that need to be met in order to both qualify for and maintain IC-DISC status (request our free IC-DISC Brochure for specifics!). We work with our clients to ensure that the meet the initial requirements during the initial set up and then continue to meet them once the entity is operational. These requirements are not arduous, they just need to be met and reviewed each year as part of the annual maintenance process.
IC-DISC Myth #5 – IC DISCs are tax shelters and subject to the FBAR reporting requirements
As noted above, an IC-DISC is a US corporation that elects IC-DISC status. It does not hold or maintain any foreign bank accounts or assets that are housed off-shore. Remember that an IC-DISC is a tax incentive that Congress enacted in 1971 (you can find the complex regulations under Internal Revenue Code Sections 991-997) for US taxpayers and is not considered a tax shelter.
While the IC-DISC has been a part of the tax code for more than 40 years, the benefits to US taxpayers have never been stronger. This tax incentive can generate substantial tax savings for companies delivering products and services outside the US and should be considered as part of your annual tax planning process.
"After meeting other IC-DISC firms, we chose ETM due to their unparalleled experience with the IC-DISC as well as a solid understanding of our industry. We would highly recommend ETM to anyone."Vice President Scrap Recycler (Boston, MA)
"We replaced our prior IC-DISC service provider with ETM, and we were pleased with the tremendous increased federal income tax savings as well as truely personalized service to meet the needs of our company."President Manufacturing Company (Chicago, IL)
"We realize the value of ETM's work and know that we can consult true international tax experts directly at any time. This is impossible to find else where."Tax Partner CPA Firm (Charleston, SC)
"Export Tax Management (ETM) has successfully implemented the IC-DISC for many of our clients, and we will continue to utilize them in the future."Partner Regional CPA Firm (Los Angeles, CA)
"We utilize ETM for all of our IC-DISC's as they have the most experience and resources in the industry to assist us with serving our clients. Their combination of international taxation and industry experience is impeccable."Managing Tax Partner Regional CPA Firm (Boston, MA)
"ETM is the sole provider of IC-DISC services for our family of companies. As such, we recommend ETM to other partners that export their products as well."Vice President Exporter (Hartford, CT)
"As a producer in the film industry, we welcomed the opportunity to work with ETM to implement the IC-DISC structure and significantly reduce federal income tax for our investors."Film Producer (New York, NY)