[IMGCAP(1)]Job creation! More U.S. exports! Reduce taxes!

Sound like the nightly news? The United States continues down a required path of job creation and increasing our exports just to stay financially solvent. Add to that a reduction in business tax rates to stay competitive with the rest of the world and be a desirable location to base manufacturing operations. Impossible? There is actually a structure that exists today that encourages exports, creates jobs in the U.S. to produce the goods, and saves companies real tax dollars, which can be used to reinvest in the company’s expansion, research and development or to pay for additional job creation. But almost nobody knows about it!

Years ago, in an effort to support those companies that export goods from the U.S., Congress established the little-known Interest Charge Domestic International Sales Corporation (better known as the IC-DISC). Initially, the advantage of this type of organization was to allow companies to defer paying taxes on up to $10 million of revenues, subject only to an interest charge provision. However, there were far more glamorous corporate structures and tax deductions to benefit exporters in those days, which have since gone by the wayside. As tax rates have changed over the years, this same type of organization now can deliver a 20 percent tax rate advantage to businesses on a portion of their export income, potentially saving hundreds of thousands of dollars annually.

The IC-DISC company is set up to serve as the export sales agent for the U.S.-based operating company. The export product must be something that is manufactured, created or grown primarily in the US. The ultimate sales destination of these products is overseas. This includes companies that manufacture products, agricultural growers, architectural and engineering design services, and makers of component parts going into assembled products for overseas delivery.

The IC-DISC earns a commission from the operating company, which is calculated based on the greater of 4 percent of gross export receipts, or 50 percent of net export profits. This commission must be paid out annually in order to get the deduction in the operating company (at ordinary income tax rates, currently up to 35 percent).

The IC-DISC earns the commission revenue, but is not a taxpaying entity. The funds are distributed to the owner(s) of the IC-DISC, payable to them as taxable qualified dividends. Such dividends are currently taxable at a 15 percent long-term capital gains rate, thus effectuating a 20 percent reduction in tax rates on the income. This differential in tax rates came into play in the Jobs Act of 2004. Rates were extended two additional years at the end of 2010, keeping them in effect until Dec. 31, 2012.

This benefit is not one that is just intended for Fortune 500 Companies. This may be beneficial to many businesses in our community who have export sales of $2 million or more. Currently only about 6,000 businesses in the US are taking advantage of this structure, but thousands more could be using it today.

Example:

Assumptions

*  ManuCo has total sales of $100 million, of which export sales account for $10 million
*  Cost of good sold totals $70 million, of which export COGS account for $7 million
*  Selling and G&A expenses totals $10 million, of which $1M are allocated to exports

 

Without IC-DISC:

Foreign Trading Gross Receipts               $10,000,000

Foreign Trading COGS                            7,000,000

Foreign Selling & G&A                              1,000,000

Export Net Income                                   $ 2,000,000

Tax Rate                                                   35%

Tax Paid                                                   $ 700,000

With IC-DISC:

 

    Combined

    ManuCo

   IC-DISC

 

Foreign Trading Gross Receipts

 

$10,000,000

 

$10,000,000

 

COGS

 7,000,000

 7,000,000

 

Selling & G&A

 1,000,000

 1,000,000

 

Export Net Income

$2,000,000

$2,000,000

 

IC-DISC Commission (greater of):

50% of Export Net Income ($1M) or

4% of Export Gross Receipts ($400k)

 

(1,000,000)

$1,000,000

Tax Base after IC-DISC Commission

 

$1,000,000

$1,000,000

Tax Rate

 

 35%

 15%

Tax Paid

$500,000

$350,000

$150,000

 

IC-DISC Net Tax Savings: $700,000 - $500,000 = $200,000

As you can see, the potential for real tax savings is immense, and really steers toward the goals of the US and business owners at the same time. Of course, there are many nuances to properly structure this, be fully compliant and enjoy the maximum tax benefits allowable, so professional help is vital. But the opportunity is phenomenal, so don’t be afraid to take the first step.

Heather K. McDonough, CPA, is a tax partner at Berman Hopkins Wright & Laham, CPAs and Associates LLP in Melbourne and Orlando, Fla.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access