IC-DISC and FDII – Export Tax Options for Businesses

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IC-DISC and FDII are two export incentives for US-based companies with foreign presences to utilize around tax time. However, they have enough differences that you must know one versus another to select the most optimal tax incentive for your business. What are the differences between FDII and IC-DISC?

IC-DISC and FDII are different in areas of corporate structure and available benefits. For example, FDII does not require companies to create separate US companies like IC-DISC. Additionally, FDII does not apply to S-corporations, only C-corps, unlike IC-DISC tax benefits. FDII tax incentives might also decrease by 2025. 

This guide to FDII and IC-DISC will explain both export incentives separately, then compare them and assess their differences. Your corporation will be ready to decide which incentive to apply for.

Overview of IC-DISC and FDII

A cargo ship is exporting goods out of the USA

Your business must understand FDII and IC-DISC before applying for these tax incentives. This overview will provide a definition of both, share some background, and review the eligibility criteria.

Introduction of IC-DISC

IC-DISC, or Interest Charge-Domestic International Sales Corporation, is a type of export tax credit for corporations operating in the United States. This tax incentive allows the registering corporation to defer its taxes until later to reap profits in the interim. Commission payments based on export gross receipts are another feature.

Introduction of FDII

FDII, or Foreign Derived Intangible Income, is a tax deduction for selling products attached to an intellectual property, including patents. When a US company with a US-based IP sells the IP or related products to a foreign customer, the company becomes eligible for a reduced sales tax rate.

We’ll continue explaining how IC-DISC and FDII diverge throughout this article, with plenty of examples and eligibility criteria to guide your decision.

Export Tax Management Inc.’s extensive services include IC-DISC incorporation and compliance. Contact our export tax experts to learn about your IC-DISC options.

Definition of IC-DISC

IC-DISC is a leading export tax incentive for US businesses, but is it right for your company? Let’s review with some information on how it works.

Definition and Background

IC-DISC is a federal tax incentive for US corporations exporting products. US Congress created the incentive in the 1970s as an impetus to expand exports. Corporations that apply for IC-DISC status can enjoy tax deferrals, lower tax liability, and tax-free income on qualifying foreign income.

Congress once limited DISC benefits in the 1980s, but a resurgence in the late 2000s saw IC-DISC tax incentives becoming a valuable means for companies to increase capital gain.

A registering IC-DISC is eligible for a commission payment based on the export gross receipt rate. The commission payments do not accrue federal taxes, and the IC-DISC corporation has less taxable income.

Transferring taxable income into qualified dividends is another trademark of IC-DISC tax rules.

IC-DISC is also largely beneficial, increasing the capital a corporation has access to and granting it more freedom to develop products or grow in other ways. Other perks include reduced reliance on loans and increased international competition.

Eligibility Criteria for IC-DISC

Here is an overview of IC-DISC eligibility requirements:

  • You are not a member of a controlled group of foreign sales companies.
  • You maintain separate records for the IC-DISC.
  • The principal shareholder conforms to the tax year period.
  • Up to 95 percent of the assets are inventory for export.
  • Up to 95 percent of the gross receipts are for goods produced in the US.
  • The value of single-class stocks is at least $2,500.

Tax Benefits for Businesses

The accountant is happy for the result of tax deduction for their export company.

An IC-DISC corporation pays its shareholders dividends at a tax rate of 20 percent.

Definition of FDII

Businesses with intellectual property and a foreign presence should consider the FDII export tax incentive. This section will explore the ins and outs.

Definition and Background

Continuing our assessments of IC-DISC and FDII, here is some background on Foreign Derived Intangible Income.

FDII is intellectual property income exported from the US. The US followed a worldwide tax system until 2017 t when the Tax Cuts and Jobs Act introduced a territorial taxation system for corporations.

Under the territorial tax system, profits for multinational corporations in foreign countries do not contribute to the domestic tax base. These are sometimes referred to as participation exemptions.

FDII is calculated by taking the foreign-derived income and subtracting 10 percent from a Qualified Business Asset Investment, or QBAI. The QBAI is the tangible asset value when calculating foreign-derived income earnings.

Eligibility Criteria for FDII

The team leader discuss the criteria for FDII

Your corporation must qualify as a C-corporation to apply for FDII. C-corps are separate entities from shareholders and owners for tax purposes and receive corporate income taxes. Secondarily, your corporation must sell IP-related products and generate gross income from exports.

Tax Benefits for Businesses

FDII-eligible corporations can utilize a tax rate of 13.125 percent for every dollar of taxable income. Maximize your FDII benefits with Export Tax Management Inc.’s expert services.

Comparison: IC-DISC vs. FDII

Key Similarities and Differences

IC-DISC and FDII share a few common threads, including:

  • Applies to US corporations
  • Foreign income is eligible
  • Reduces tax payments

However, FDII and IC-DISC are dissimilar in many more ways, such as:

  • The corporate structure varies for eligibility, with FDII only permitting C-corporations in the US to apply.
  • IC-DISC tax incentives require the formation of a new corporation, whereas FDII allows the organizational structure of a corporation to remain the same.
  • You often pay accountant and attorney fees to become a qualifying IC-DISC corporation.
  • FDII does not have a manufacturing requirement, but IC-DISC does. The companies must have an export property value of 50 percent that’s exclusively extracted, grown, produced, or manufactured in the US.
  • IC-DISC tax benefits work best with distribution to dodge interest charges, whereas FDII doesn’t need any distribution.
  • FDII is a newer tax benefit that might be reduced as early as 2025, whereas IC-DISC is longer standing with a surer future.

What Influences the Choice for a Corporation – When to Choose IC-DISC over FDII and Vice-Versa

The biggest determining factor for whether a US-based corporation should select IC-DISC or FDII export tax benefits is eligibility.

Besides that, a corporation might rely on factors like tax benefit rates and the long-term status of the export incentive to influence their decision-making.

A manufacturer eager to reduce its tax rate might seek IC-DISC tax benefits. For example, if the average corporate tax rate is 35 percent per year, a qualified dividend income of 20 percent allows them to save on their taxes by 15 percent.

Here’s an example of FDII. If a company’s QBAI is $9,000 of exports, their FDII is $100, as you can subtract $1,000 of foreign income by a QBAI of 10 percent or $900. The company can take 37.5 of the FDII for taxable income.

Companies may sometimes be eligible for IC-DISC and FDII tax exemptions within the same tax year. Export Tax Management Inc. can help you determine your tax break eligibility.

Compliance and Reporting Requirements

Compliance Guidelines for IC-DISC

The exporter expert explain the compliance guidelines of IC-DISC for his client.

Compliance is critical, and IC-DISC corporations must pass QER and QEA tests. QER is short for qualified export receipts and requires a corporation to have a rate of 95 percent export receipts in an average tax year to qualify.

QEA stands for a qualified export asset. The corporation’s export assets must be within 95 percent of the sum of their adjusted asset basis within the tax year.

FDII Reporting and Documentation Obligations

You must document FDII tax incentives in IRC Section 250, Form 8993.

The form requires:

  • Gross income
  • Exclusions
  • Financial services income
  • CFC dividends
  • Domestic gas and oil extraction income
  • Foreign branch income
  • Total exclusions
  • Deductions
  • deemed tangible income return or DTIR
  • Gross receipts
  • Cost of goods sold or COGS
  • Interest deductions
  • Experimental and research deductions

Common Mistakes and Pitfalls to Avoid During Tax Filings

Corporations seeking export incentives like IC-DISC commissions and FDII tax breaks should take special care to avoid these errors:

Always file your taxes, even if you’re not eligible to pay taxes for the calendar year.
Triple-check income to avoid underreporting or overreporting mistakes.
Improve recordkeeping to report all your income.
Confirm your math to ensure your calculations are done correctly.
Work with an expert team, like Export Tax Management, Inc.

Book a Consultation for IC-DISC and FDII Now

The tax consultant is answering questions about IC-DISC and FDII.

IC-DISC and FDII incentives on qualifying exports can reduce a corporation’s tax burden, increase available capital, and enable businesses to grow.

The differences between the tax incentives mean that a corporation might be eligible for FDII instead of IC-DISC or vice-versa. Select corporations are even eligible for both tax breaks.

Export Tax Management Inc. has saved over $250,000,000 for its clients and completed over 3,000 IC-DISCs. With 53 CPA firm partners and counting, you can rely on our services and expertise for your taxes.

Contact our tax experts today to discuss your IC-DISC and FDII eligibility.

Tax Incentives for Exporters – IC-DISC, FDII, and More

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Tax incentives for exporters allow United States-based corporations exporting to foreign countries to increase their savings and lower their tax liability. The goal of these incentives is to maximize foreign exports. What are tax incentives to exporters, and how do they work?

The two primary US-based tax incentives for exporters are the Interest Charge Domestic International Sales Corporation (IC-DISC) and Foreign Derived Intangible Income (FDII). An IC-DISC is a separately formed business entity that makes a commission on certain export sales. The federal tax rates are lower when those payments are distributed as qualified dividends.

This guide to export incentives will explain your options in more detail, the expected tax benefits and other advantages, and how to begin reaping tax savings.

Overview of Tax Incentives for Exporters in the USA

Two cargo ship is exporting goods from United States with tax incentives.

According to the International Trade Administration, the US already exports $2 trillion in services and goods worldwide but can always afford to expand.

That’s why Congress created the IC-DISC in 1971. That’s not the only tax incentive for US corporations with foreign presences; FDII is another popular option.

Export Tax Management Inc. specializes in IC-DISC incorporation, compliance, and implementation. Explore your tax incentive options with our services.

The Types of Tax Incentives for Exporters in the USA

Here’s an overview of the tax incentives exporters can take advantage of:

Tax Credits

Tax credits allow taxpayers to deduct a specific amount by the dollar from their federal income taxes. Businesses pay less money on their taxes as a result. Tax credits can be partially refundable, fully refundable, or nonrefundable.

A refundable or partially refundable tax credit generates a refund according to the prescribed amount. States and the federal government will make tax credits available to qualifying businesses.

Tax Deductions

The accountant is calculating how much the tax deductions for her exporter client.

Another type of tax incentive exporters should consider is a tax deduction. Businesses can subtract a sum from their taxable income, paying less on their taxes. Types of deductions include itemized or standard deductions.

You subtract the amount due by taxable income, and thanks to The Tax Cuts and Jobs Act, the amount of standard deductions is higher than ever

Some deductions small businesses and startups are eligible to claim on their tax returns are as follows:

  • Startup expenses
  • Vehicle costs
  • Property, sales, and local taxes
  • Maintenance and repairs
  • Pass-through tax deductions
  • Loan interest
  • Regulatory and licensing fees
  • Professional and legal fees
  • Insurance
  • Equipment
  • Bad debts
  • Marketing and advertising
  • Business travel

Tax Exemptions

Exporters should also look into their tax exemption eligibility. A tax exemption reduces the corporation’s tax obligation. For example, municipal, county, and state governments offer exemptions.

IC-DISCs and other tax-exempt organizations can also reduce their federal income tax rate.

Tax incentives share many similarities, namely in how they reduce a corporation’s taxes owed. However, the different ways incentives lower taxes and the eligibility criteria make it worth a corporation’s time to thoroughly explore deductions versus credits versus exemptions, especially as they apply to IC-DISC and FDII.

Learn more about the differences between these two tax incentives for exporters.

Why the IC-DISC Is the Best Choice as a Tax Incentive

IC-DISC stands head and shoulders over FDII and other tax incentives for exporters eager to claim more tax savings. An IC-DISC is a Congress-issued tax incentive and tax code to broaden the scope of US sales in foreign countries and open the door to exporting.

Eligible companies must establish an IC-DISC separate from their main entity, with it operating as a tax-exempt entity without office space or employees. The exporter or shareholders must form the IC-DISC, with a required delineation between it and C corporations.

When the corporation makes an international sale, it owes the IC-DISC a commission. The commission is deductible as a business expense. No federal income taxes are owed until the IC-DISC begins paying owner dividends.

The dividends have a tax rate of only 23.8 percent.

When should a corporation consider applying for IC-DISC status? Seek this tax benefit if a high tax rate has impeded business growth. Export Tax Management Inc. can help you determine the right road to tax savings and incentives for your business.

Contact us today to determine if IC-DISC status is right for you.

IC-DISC Tax Returns: Credits and Deductions

Accountants are reviewing client form 1120 for IC-DISC tax returns.

According to Schedules C and E of IRS Tax Form 1120, qualifying corporations can make the following deductions:

  • Freight insurance and freight
  • Contributions
  • Interest
  • Licenses and taxes
  • Bad debts
  • Employee benefit programs
  • Profit-sharing plans and pensions
  • Maintenance and repairs
  • Officer compensation
  • Warehousing
  • Sales commissions
  • Rent
  • Wages and salaries
  • Advertising and market studies
  • Nonqualified inclusions and dividends
  • Qualified dividends
  • Total inclusions and dividends
  • IC-DISC dividends (including former DISCs)
  • Global Intangible Low-Taxed Income or GILTI
  • Inclusions from controlled foreign corporation sales, in which a lower-tier foreign corporation’s stock was sold
  • Dividends from foreign sources where the foreign corporation owns at least 10 percent but is not a hybrid corporation
  • Dividends from wholly-owned foreign subsidiaries
  • Dividends from foreign corporations with less than, equal to, or more than 20 percent owned
  • Dividends on certain preferred stocks from public utilities that are less than or more than 20 percent owned
  • Dividends from foreign or domestic corporation debt-financed stock
  • Dividends from foreign corporations that are less than or more than 20 percent owned outside of debt-financed stock

Maximizing your IC-DISC is simple with the right support, such as from Export Tax Management Inc. For example, a bakery that produces goods in the US but sells them internationally would qualify for IC-DISC status, lessening its tax burden.

Advantages of Joining the IC-DISC Tax Incentives for Exporters

Establishing an IC-DISC allows corporations to begin reaping the following advantages.

Delaying Taxes by Waiting to Pay Dividends on the Commission

While corporations under DISC status must still file taxes within nine months from the end of their tax year and by no later than the 15th day (unless that day falls on a weekend or holiday), when the corporation has to pay taxes under this tax incentive isn’t always the same.

A corporation can wait until it generates $10 million of export sales before paying the commission as a dividend. This limit resets every year.

Spending Less Money on Taxes

Tax advisors are calculating the best taxation to less spending money on taxes.

Corporations don’t want to spend more than necessary on their taxes, as the loss in capital can trickle down to other parts of the company. A bad tax year might cause a corporation to tighten its belt, reducing staff or making other changes to stay in the green.

Tax incentives for exporters can reduce their federal income tax spending, preventing the above cost-cutting measures from transpiring. IC-DISC corporations can take a deduction on export income of up to 50 percent.

Increasing a Corporation’s Income

A corporation will have more income after delaying dividends on commissions and reducing federal income tax spending. This wealth can be used to reduce costs, expand (such as hiring more staff or opening more offices and warehouses), and research and develop new products and services.

Expanding Business Internationally

The additional income and ability to continue expanding its roster of goods and services will allow DISC-qualifying corporations to expand business internationally, increasing export revenue.

Exporting goods from the United States to other parts of the world gives businesses a competitive advantage, reduces risk (other economies might fluctuate less than their home economy), and increases access to tax incentives.

Is your corporation eager to explore tax incentives and ways to lower federal income tax? Reach out to Export Tax Management Inc. today and explore our services.

Requirements to Enjoy the IC-DISC Tax Incentives for Exporters

The managers explain the IC-DISC tax incentives requirements to their clients.

Corporations applying for tax-exempt status must understand the eligibility requirements for export tax incentives.

Here are the eligibility criteria an IC-DISC must meet:

  • Up to 95 percent of its gross receipts must be qualified gross receipts.
  • It must pass an export assets and gross receipts test.
  • It must have only one stock class that’s valued at $2,500 or higher.
  • It must have separate records from other business entities.
  • Its qualified export assets must be worth 95 percent (or more) of its asset sums when adjusted.

Qualifying corporations must document all income and spending, including dividends, deductions, special deductions, inclusions, and gross income, even if the corporation doesn’t pay taxes thanks to its tax-exempt status.

The corporation must also file taxes by the required deadline. Avoid common mistakes, such as failing to meet IC-DISC status yet filing as one anyway, skipping or leaving off important parts of Tax Form 1120, and failing to check your math before filing.

Book a Consultation Now to Learn More About Tax Incentives for Exporters

Tax incentives for exporters, such as FDII and IC-DISC, pave the way toward a brighter world economy. Corporations can expand their horizons and earn more export incentives for their time and effort.

Expedite your growth today by contacting Export Tax Management Inc.

C Corporation Form 1120 – The Most Important Elements

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C Corporation Form 1120 is an IRS tax form that new C corps can find themselves confused by when tax time arrives. Do you need to file this form for the past tax year? What is Form 1120?

C Corporation Form 1120 is a tax form that LLCs (operating as corporations) and C corporations must complete to file income taxes. File this form within three months of closing the corporate tax year no later than the 15th of the month unless the date is not a business day. Then, you can file the next business day after a holiday or weekend.

This guide to Form 1120 is designed for C corps to handle corporate taxes going forward seamlessly. We’ll provide an overview of the tax form, including its key components and tips on completing it.

Overview of the C Corporation Form 1120

The cargo ship is ready to export goods from other country after completing the C Corporation Form 1120.

Let’s get underway by unpacking Form 1120, an income tax form required for C corporations.

C corporations, or C corps, are business entities where the entity and the shareholders or owners receive separate taxation.

This business structure protects personal assets, allows for profit reinvestment, and doesn’t limit shareholders. However, compared to a sole proprietorship or S corp and especially an LLC, a C corp has the most tax paperwork.

Are you about to file C Corporation Form 1120? Export Tax Management Inc. serves many industries and can assist you.

Contact our experts today for guidance on completing Form 1120.

Understanding C Corporations in Relation to the 1120 Form

A C corporation’s relationship to the 1120 Form is one your corp will become more familiar with in future tax-filing years. In the interim, this information will help as you prepare to complete the form.

Definition and Characteristics

A C corp must pay corporate income taxes. C corps are susceptible to double taxation between personal assets and corporate taxes.

C corporations have several benefits, including some tax advantages (business expenses are tax-deductible), no limit on shareholders, an infinite ability to grow, and a limited liability to employees, shareholders, officers, and directors.

However, the double taxation issue and the fact that you can’t take deductions from corporate losses like you can an S corporation does make being a C corp tougher.

IRS Form 1120 Tax Implications and Advantages

The accounts have organized a meeting for tax implications and advantages of the IRS Form 1120.

Filling out C Corporation Form 1120 isn’t something C corps should look to do only because it’s required. It also has many advantages.

For instance, you’ll find it easier to calculate your tax refund after completing this IRS form. The information therein indicates the identity of each of your owners and shareholders to ensure everyone gets their due refund.

The IRS will also understand more about the parties that comprise the C corp, including their ownership stakes by percentage. This keeps your business operations transparent and can reduce future tax headaches.

Finally, completing Form 1120 clearly shows your business income sources. Tax returns, sales, and other forms of revenue are included on the form, further lending your C Corp more transparency.

Demystifying IRS Form 1120

C corps examining Form 1120 for the first time can be left scratching their heads. This overview of C Corporation Form 1120 will paint a more complete picture of what the form requires before you begin filling it out.

Filing Requirements

Domestic corporations based in the United States that meet the definition of a C corp must complete this form. The most recent version of the form is available via the IRS.

Most federal income taxes are due on Tax Day, which is April 18th. However, that’s not the case with Form 1120. C corps are required to file it within three months of the cessation of the corporate tax year. The deadline is the 15th of that month.

For example, if your tax year concludes in March, you must complete Form 1120 no later than June 15th.

The filing deadline is the following business day if the 15th falls on a weekend or holiday.

Key Components of Form 1120

IRS Form 1120 breaks down into the following components.

Tax Payments

The Tax Computation and Payment section of C Corporation Form 1120 requests information such as income taxes, base erosion minimum tax amount, foreign tax credits, general business credits, Form 8834 credits, credits from the prior year’s taxes, and bond credits.

You must also include financials such as your business entity’s personal holding company tax, investment credit recapture, low-income housing credit recapture, interest from the look-back method, and alternative tax on qualified shipping activities.

Deductions

The accountant is calculating the tax deduction after completing the C Corporation form 1120

Under Schedule C, Dividends, Inclusions, and Special Deductions, Form 1120 requires information on domestic corporate stock, debt-financed stock of foreign corporations, public utility stocks, foreign corporation stocks, and dividends from any wholly-owned foreign subsidiaries.

The form section also tracks dividends from affiliated group members, Global Intangible Low-Tax Income or GILTI dividends, and IC-DISC dividends.

Income

This section of IRS Form 1120 contains all your income, including gross sales or receipts, allowances, returns, gross profit, dividends, interest, gross royalties, gross rent, and net gains.

How to Complete Form 1120

As your business completes C Corporation Form 1120 in time for the deadline, here is some information to assist you in putting together the paperwork.

Gathering Necessary Information

IRS Form 1120 requests business information like your small business name, incorporation date, employer identification number or EIN, and mailing address. You should have it ready before you complete the form.

This information goes to the top of the tax form.

Besides the information on Form 1120, you must also answer questions in Schedule K, Other Information.

This section asks questions about your checking account method, service or product, business activity, interest rates in domestic or foreign partnerships, total receipts, and more.

Organizing Financial Data

To complete this tax form accurately, you must have a detailed record of the past corporate tax year’s financial data. You must start if you don’t already have a designated organization system for your business’s financial records.

That will make it easier to manage your financial data in future years as a C corporation.

Accurate Reporting of Income

Accuracy is at the heart of your federal income tax reporting. The double taxation rate can hit a C corp hard, but flubbing numbers will bite you later. You must prioritize accurate reporting to maximize your tax return and avoid business-threatening legal consequences.

Filling out C Corporation Form 1120 doesn’t have to be confusing or complicated. Let Export Tax Management Inc. simplify your corporate taxes this year.

Compliance and Best Practices of Form 1120

The accounts conduct a meeting to discuss the best practices of Form 1120.

On that note, let’s conclude with a series of best practices and compliance rules around completing and filing Form 1120.

Timely Filing and Extensions

Form 1120 doesn’t have an April deadline, per se, but it still holds a hard and fast deadline. File your taxes in advance of the deadline so you don’t risk cutting it too close.

Extensions are allowed for filing Form 1120. However, you must consult with a tax professional about an extension. They will assign you a new tax filing deadline. You must meet that deadline.

Accurate Financial Records

To underscore our point from the last section, accuracy is a must when filing corporate taxes. Accurate records of your financials from the onset enable you to complete tax forms with less stress.

Double-check all numbers before entering them on the tax form.

Understanding Changes in Tax Laws

Tax laws are not static. Thus, how a C corp files taxes this corporate year can change in future years. Your business must stay abreast of changes affecting C Corporate Form 1120 and other C corp taxation to ensure accuracy around tax time.

Seeking Professional Assistance

Filing corporate taxes is long, arduous, and time-consuming. However, you don’t have to do it alone. You could use tax software, although we’d recommend advising a tax professional for the first few years – this is especially true for the C Corporation Form 1120The tax professional can teach you the ropes of filing C corp taxes. Once you understand the ins and outs, you can file more independently with tax software.

Avoiding Common Mistakes

The tax professionals review the C Corporation Form 1120 to avoid common mistakes for their clients.

Taxpayers can fall into traps when completing tax forms due to a lack of knowledge or hastiness. C corporations should be especially cautious about the following:

  • Filing early, as it’s usually indicative of rushing through the process.
  • Inputting information such as interest, dividends, and income differently than how the IRS has reported this data to you.
  • Mistyping or misspelling a business name, shareholder name, or other pertinent business information.
  • Skipping the Social Security number or EIN.
  • Inputting items on the incorrect line.
  • Doing your math incorrectly.
  • Using the wrong filing status.
  • Failing to sign your tax form, which can also happen when you rush.
  • Not understanding the basics, such as FDII and IC-DISC differences.

Book a Consultation to Learn More About C Corporations

C Corporation Form 1120 is a federal tax form required of C corps after a tax year. The form is rather complex and requires a lot of information, so methodically filling it out, double-checking the reported numbers, and consulting with tax professionals will make it easier.

Export Tax Management Inc. are the pros you need when completing Form 1120, so book your consultation today.