TAKE ADVANTAGE OF EXPORTING INCENTIVES
This month, we’re pleased to have a guest post by Chris Jones. He is an attorney in the wealth planning group of Sprouse Shrader Smith PLLC. Chris is double board certified in the areas of estate planning & probate and commercial real estate.
Christopher D. Jones
When looking at a map, Amarillo appears to be nearly in the exact middle of the United States, just as far from the west coast as it is from the east coast. Given that fact, one might think Amarillo would not be the home of many international exporters. Well…one would be wrong.
The Texas panhandle is home to a surprising number of manufacturers that, for whatever reason, find themselves shipping products all over the world. Demand for a product across the globe is, of course, good for business. However, selling goods internationally can also be good for taxes.
Manufacturers that export products to other countries (or manufacture an item or part used in a product that is exported) can potentially recognize substantial tax savings by using an IC-DISC is. An Interest Charge – Domestic International Sales Corporation (an “IC-DISC” or “DISC”) is created by § 992 of the Internal Revenue Code and subject to a litany of treasury regulations. Boring, right? Well, here is the kicker: an IC-DISC does not pay income tax.
Let me repeat that last sentence: AN IC-DISC DOES NOT PAY INCOME TAX.
How does it work? Essentially, the IC-DISC allows manufacturers to turn a portion of ordinary income into capital gains. This is done by shifting income to the IC-DISC in the form of a commission. The manufacturer deducts the commission, and the IC-DISC can distribute the money to its shareholders at dividend Rates.
Consider a hypothetical example: Farmer John makes wheel bearings used in tractors all over the world. Currently, Farmer John generates a million dollars of taxable income each year from his export sales. By using an IC-DISC, Farmer John can deduct a large portion of his export income (generally half), by paying it to the IC-DISC. Farmer John then pays taxes at dividend rates when the IC-DISC distributes the commission to him. Let’s look at two scenarios, one with an IC-DISC and one without:
By using an IC-DISC, Farmer John was able to save over $80,000 in taxes on $1,000,000 in export income.
What’s the catch? Well, there are some technical rules to follow…and yes, you need an attorney to help you set this up…and yes, your accountant will have more work to do. However, those costs will likely pale in comparison to the tax savings that will immediately result from the use of an IC-DISC.
What does the IC-DISC have to do in return for the commission? The answer is “nothing.” In fact, the IRS’s audit guide for IC-DISCs states that an IC-DISC is not concerned about performance of any activities and, therefore, does not need employees or office space and does not have to actually participate in the soliciting, negotiating or concluding of any sales contract or perform any economic functions to earn a commission.
Simply put, the use of an IC-DISC and the payment of the commission are expressly allowed by the Internal Revenue Code. If you manufacture exported products, or if you manufacture a good or part used in exported products, ask your attorney or CPA about an IC-DISC.