Unlocking extra value from an IC-DISC
Most CPAs are familiar with the tax benefit of using an interest charge – domestic international sales corporation, or IC-DISC. What many do not realize is the additional benefit that can be generated by paying particular attention to the method of calculation.
Oftentimes IC-DISC commissions are calculated using either the 4 percent qualified export receipts method or the 50 percent combined taxable income method on aggregate sales or income. These methods, known as safe harbor or simple calculations, are able to produce a tax benefit in profitable years but can fail to generate significantly more savings for the exporter.
Though many CPAs help clients calculate IC-DISC commissions with these methods, further value can be achieved by maximizing commissions with the transaction-by-transaction, or TxT, methodology and cost analysis.
Unlike using one calculation method on aggregate sales or income, the TxT methodology applies either the 4 percent QER or 50 percent CTI to each individual transaction. Various product line and product family groupings can be used to determine overall profit percentages and combined taxable income calculations that can further maximize an IC-DISC commission. Such an analysis can result in substantial additional savings and avoid backlash from clients who learn they’ve been missing this opportunity.
I recently worked with a taxpayer who had export sales in the range of $2.5 million to $3 million annually between 2016 and 2018. Using the safe harbor 4 percent calculation, their IC-DISC commissions ranged from $100,000 to $120,000. After conducting a full TxT analysis, the taxpayer’s IC-DISC commissions increased to more than $300,000 per year. This minor change in approach saved the client what will likely be millions of dollars. Such a large increase is somewhat abnormal, but it provides a good illustration of the potential impact.
So what can CPAs do about this? To run a full TxT analysis, a company must develop software to analyze individual transactions. For most CPA firms, this is not a viable route as the cost to run a TxT analysis would outweigh any additional benefit. A specialty firm can act as a back office, performing these calculations and passing results on to the CPA firm.
An efficient, cost-effective approach to IC-DISC is even more important in the post-Tax Cuts and Jobs Act environment. Lowered tax rates have reduced an IC-DISC calculation’s benefit due to the reduced discrepancy between a company’s tax and capital gains rates. Maximizing the commission through a TxT analysis can help make up some of that difference.