Seattle International Tax Attorney Blog
Law firm of Harlowe & Falk LLP
IC-DISC, Basics of the IC-DISC Export Tax Incentive
What is an IC-DISC?
IC-DISC stands for interest charge domestic international sales corporation. The IC-DISC tax incentive is authorized by Congress.
How is the IC-DISC commission calculated?
The sales commission paid to the IC-DISC is calculated using one of three permissible methods: (1) 4% of qualified export receipts; (2) 50% of the combined taxable income from export sales; or (3) the arm’s length amount determined under section 482.
How does a domestic corporation elect IC-DISC status?
A domestic corporation may elect IC-DISC status by filing IRS Form 4876-A, Election to be Treated as an Interest Charge DISC (see http://www.irs.gov/pub/irs-pdf/f4876a.pdf).
How does a domestic corporation qualify as an IC-DISC?
As discussed above, an IC-DISC must be a domestic corporation. The corporation may only have a single class of stock that has a minimum par value of $2,500. In addition, the domestic corporation must pass both a gross receipts and export asset test.
How is the IC-DISC gross receipts test calculated?
The IC-DISC Gross Receipts test states that 95% of the gross receipts of the IC-DISC must constitute qualified gross receipts. Qualified Gross Receipts include the following:
Gross receipts from the sale, exchange, or other disposition of export property;
Gross receipts from the lease or rental of export property for the use outside the United States;
Gross receipts for services that are related in or are subsidiary to any exchange of property;
Interest in any obligation that is a qualified export asset;
Gross receipts for engineering or architectural services for construction projects located outside the U.S.; and
Gross receipts for the managerial services for furtherance of production or other qualified export receipts.
What is IC-DISC export property?
IC-DISC must meet three requirements in order to be deemed to receive income from a sale of export property: (1) manufacturing requirement, (2) destination requirement; and (3) maximum 50% foreign content requirement.
How is the IC-DISC manufacturing requirement calculated?
The manufacturing requirement requires that the property must be manufactured, produced, grown or extracted in the United States by a person other than the IC-DISC. Under the IC-DISC regime, property is “manufactured” in the U.S. if either: (1) 20% of its conversion costs are incurred in the U.S., (2) there is a substantial transformation in the U.S., or (3) the operations in the U.S. are generally considered to constitute manufacturing.
How is the IC-DISC Destination Requirement calculated?
The destination requirement requires that export property must be held primarily for sale, lease or rental for direct use, consumption or disposition outside the U.S. Clearly, property satisfies this test if delivered to a freight forwarder for ultimate shipment abroad. However, sales to a domestic company may also qualify as export property in certain cases. Sales to a purchaser in the U.S. can qualify if the property does not undergo further manufacturing or use by the purchaser prior to export, and the property is shipped to a foreign destination within a year.
What types of property are ineligible to be qualified as export property?
Five types of property are ineligible to be qualified export property: (1) property rented for use by a related party; (2) intellectual property other than films, tapes, records or computer software; (3) unprocessed softwood timber; and (4) property the President designates as being in short supply.
How is the IC-DISC 50% foreign content requirement calculated?
The export property must have a minimum of 50% U.S. content. This means that no more than 50% of the fair market value (“FMV”) of the property may be attributable to the FMV of goods imported into the U.S.
How can an electing company maximize the IC-DISC tax incentive benefits?
IC-DISC benefits are maximized by maximizing the permissible sales commission paid to the DISC corporation. As discussed above, there are three permissible methods to calculating the IC-DISC commission: (1) 4% of qualified export receipts; (2) 50% of the combined taxable income from export sales; or (3) the arm’s length amount determined under section 482.
Can different permissible methods be used simultaneously?
The rules allow for different methods to be used on sales of different products based on product lines, recognized industry or trade usage, or transaction by transaction. Several techniques may allow for the potential increase in IC-DISC benefits.
What is the IC-DISC grouping method?
The grouping method allows an exporter to maximize IC-DISC commissions by separating high-margin sales from low margin sales. There is flexibility in determining groupings, and generally a taxpayer’s grouping will be accepted if it conforms to recognized trade or industry usage.
What is the IC-DISC marginal cost method?
Generally, combined taxable income equals the excess of the qualified export receipts over the total direct and indirect costs related to exports. However, if the company elects marginal costing method, only marginal costs are taken into account in computing combined taxable income. This method may allow the company to increase combined taxable income by the amount of the fixed costs related to export sales. A limitation exists, limiting the combined taxable income of an exporter to an amount equal to full costing for all sales times the ratio of qualified export receipts to total receipts. This limitation will generally make the marginal costing method beneficial only if export sales are less profitable than domestic sales.
What is the IC-DISC expense allocations method?
As discussed above, a permissible method of determining the IC-DISC commission is the 50% combined taxable income method. A taxpayer may be able to increase the commission paid by reviewing all expenses and permissibly allocating more deductions to domestic sales, increasing the amount of the commission paid to the DISC company.
What are the costs associated with an IC-DISC?
As discussed above, the IC-DISC tax incentive generally creates a mere “paper company” and does not require any changes with respect to the operations of the current operating company. The DISC corporation is a separate legal entity and must be registered with a state. In addition, the DISC must keep separate books and records and must file a separate yearly return, 1120 IC-DISC (see http://www.irs.gov/pub/irs-access/f1120icd_accessible.pdf. Therefore, the costs associated with the DISC structure are generally minimal, as they are usually restricted to accounting and legal fees. To the extent benefits of the DISC structure outweigh the accounting and legal fees, the DISC structure will provide an after tax benifit.
How can our IC-DISC tax attorneys help you?
IC-DISC tax attorneys at Harlowe & Falk can help determine whether your business is eligible for IC-DISC tax benefits, and help determine your potential tax savings under the program. Our IC-DISC tax attorneys based in the greater Seattle area provide assistance to clients nationally, and can also help your business implement and maintain the IC-DISC structure, ensuring your compliance with IRS requirements.
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Mehrdad is a partner at the law firm of Harlowe & Falk LLP. Based in the greater Seattle area, but with clients internationally, Mehrdad's practice includes international tax consulting. This includes consulting with clients on inbound transactions, outbound transactions, mergers & acquisitions, and IC-DISC....