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Interest Charge – Domestic International Sales Corporation
Kevin Heyde, Mountjoy Chilton Medley James Seiffert, Stites & Harbison
January 19, 2011
• Explain the tax benefits of an IC‐DISC to your company and shareholders • Rules to qualify for IC‐DISC benefits • How to establish an IC‐DISC
– for our discussion today we will be discussing IC‐DISC that is a “Commission DISC” not a “Buy/Sell DISC”
S. source (new or used) majority content of US value (>50% value U. engineering or architectural services for construction project outside of U.Should a Taxpayer be Considering an IC‐DISC? • Would my company and shareholders benefit from an IC‐DISC? • Does your company export products? • Are products exported produced.S. grown or extracted from U.? • Is your company a pass through entity such as an S‐Corporation or Partnership? 3 .S.)? • Does your company provide services e.g.
Legal Structure • Domestic corporation incorporated under the laws of any state or District of Columbia – One class of stock – Par or stated value of outstanding stock is at least $2.500 on each day of the taxable year – Corporation has made an election to be treated as an IC‐ DISC. filed during the 90 days preceding the first day of the corporation’s taxable year 4 . executed by an authorized officer of corporation and ALL shareholders owning stock on the first day of IC‐DISC’s taxable year • Newly formed entity. filed within 90 days of beginning of the corporation’s first taxable year • Existing entity.
not an all inclusive listing: – Corporation exempt from paying taxes – Personal holding company – Associations that are not corporations but are taxable as a corporation – Regulated investment company – S‐Corporation – An insurance company 5 .Ineligible Entities • Entities that cannot elect IC‐DISC treatment.
Additional Requirements • 95% of IC‐DISC’s receipts must be “Qualified Export Receipts” • 95% of the adjusted basis of its assets must be “Qualified Export Assets” at the end of its tax year • Have same tax year as primary shareholder • Maintain its own set of books and records • Cannot be a member of a controlled group with a Foreign Sales Corp (“FSC”) • Export sales prior to incorporation. capitalization and election to be treated as an IC‐DISC do not qualify for IC‐ DISC benefit 6 .
7 . • Lease or rental of “export property” used outside the U.S.S.S.Qualified Export Receipts & Export Property • Qualified Export Receipts – Gross receipts from • Sale. • Commissions earned on the sale or rental of export property • Services which are related and subsidiary to qualified sales • Engineering or architectural services for construction projects located outside the U. exchange …“export property.” ultimate destination and use outside of the U.
produced. or extracted in the U.S.S. by person other than DISC – Not more than 50% of fair market value of export property is attributable to imported materials into the U. 8 . grown.Qualified Export Receipts & Export Property • “Export Property” is property: – Manufactured.
buy/sell DISC Export property assets. buy/sell DISC Temporary investments of working capital 9 .e.Qualified Export Assets of IC‐DISC • Qualified Export Assets that IC‐DISC can have on its balance sheet – – – – – Accounts receivable Producer’s loans Export property (i.. inventory).
IC‐DISC Owned Directly by Flow Through Entity Individuals Business Profits & Dividends taxed to Shareholders 100% Exports Sales Non‐US Related Customer S Corporation Non‐US Customer Dividend 100% Commission IC‐DISC 10 .
Ownership Directly by Individuals Individual A Individual B Individual A Individual B Profits net of Commissions Dividends Exporter Supplier USCo Commission IC‐DISC USCo Sales Non‐US Customer Non‐US Related Customer 11 .
tax savings re: deduction • IC‐DISC pays dividend to its shareholders which is taxed at federal capital gains tax rate max.e.000 qualified gross receipts • Potential for state and local tax savings • Potential Estate & Gift Planning opportunities 12 . i. dividend income (35% vs. 15% • Net federal tax savings to shareholders on commission deduction vs.000. 15%) yields 20% • Annual deferral of federal income tax on up to $10. reducing taxable income flowing to shareholders taxed at 35%.IC‐DISC Tax Savings & Benefits • IC‐DISC is exempt from federal income tax • Exporter (Supplier) deducts commission paid to IC‐DISC.
000 80.000 * 4%) (B) 50% of export taxable income from export sales ($120.000 484.000 120.000 6.000 80.000 80.000 8.000 224.000 40.000 252.000 12.000 42.000 60.000 224.000 12.000 42.000 Dividend 13 .000 720.000 640.000 * 50%) 80.000 600.000.000.000.000 14.000 252.000 600.000 600.000 468.000 2.000 S-Corp with IC-DISC Domestic Export Total 6.000 720.000 210.000 2.000.000 14.000 720.000.000 600.000 210.000 120.000 210.000.000 (II) 16.000 120.Example of Tax Savings S-Corporation with no IC-DISC Domestic Export Total Sales Taxable Income before Commission (1) Commission expense 50/50 method Net federal taxable Income after Commission Shareholder Level Federal Tax at 35% Federal Tax on IC-DISC Dividend 15% Tax to shareholder After Tax Cash available to shareholder 210.000.000 (I) Minimum Federal Tax Savings (II) less (I) Footnote: (1) greater of (A) or (B) (A) 4% of Qualified export receipts ($2.000 8.
IC‐DISC distributes commission income earned to shareholders via a qualified dividend – IC‐DISC shareholders pay federal tax at capital gains rate maximum rate 15% (currently for 2011 and 2012) • Final commission payment by Supplier made within 90 days of determination. preparation of tax return • Tax return is filed on or before 15th day of ninth month following year end 14 .Operating the IC‐DISC • • • • • Export Sales made by Supplier to its customers. DISC is not involved IC‐DISC is transparent to Customers IC‐DISC earns commission on qualified export sales Tentative commission paid by Supplier within 60 days of year end.
2010‐28) set 2010 Base Period T‐Bill rate at . approximately equivalent to retained earnings of IC‐DISC • Interest charge rate is the Base Period T‐Bill rate published annually by IRS.34 percent (. filed separately with IRS: • Due no later than original due date of shareholder’s tax return. corporations March 15th • Federal income tax at ordinary tax rates on Accumulated IC‐DISC income not distributed. (Rev. Rul. qualified dividend • IC‐DISC shareholder (owner) pays an “Interest Charge” to the IRS when DISC earnings are accumulated and not distributed – Calculated on Form 8804.What is the “Interest Charge” • Commission to IC‐DISC defers Shareholder tax until commission distributed by the IC‐DISC. individuals April 15th. September 30 of each year.0034) • Shareholder(s) avoid interest charge if IC‐DISC does not accumulated income 15 .
000 42.000 (60.Computation of Interest Charge 2009 Prior Year DISC Taxable income and earnings and profits for the year Actual distributions during current tax year Accumulated DISC income .000 $ 120.000 2010 Current Year $ $ $ 150.000 $ 16 .end of year Calculation of interest charge: Accumulated DISC income prior year Calculation of Excess Current year distributions Current year income Current year distributions Excess Current year distributions (negative) Current year deferred DISC taxable income Assumed deferred tax liability @ 35% Interest charge using current year Base Period T-Bill Rate 2010 "INTEREST CHARGE" paid by shareholder on individual return (deductible interest) $ $ $ 150.000) $ $ $ 120.000) 210.0034 143 120.000 0.000 (60.
– Mailing address (PO Box.) • Set‐up internal processes to track qualified export sales 17 .500 • Other matters related to establishment of business. need to consider state tax treatment of IC‐DISC – – – – Draft and file Articles of Incorporation Apply for Federal Tax Identification Number Draft and adopt Corporate By‐Laws Registered Agent • Draft and execute DISC Commission Agreement • File federal election Form 4876‐A • Open bank account – Contribute minimum capital of $2. etc.g. e.IC‐DISC Set‐up • Form a domestic corporation incorporated in any state or District of Columbia. phone number.
follows federal taxable as ordinary corporation taxable as ordinary corporation nontaxable .follows federal taxable included in waters edge return combined return taxable as ordinary corporation nontaxable .follows federal nontaxable .follows federal taxable as ordinary corporation taxable as ordinary corporation taxable as ordinary corporation nontaxable .follows federal taxable as ordinary corporation taxable as ordinary corporation taxable as ordinary corporation nontaxable .follows federal nontaxable .follows federal State Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota North Dakota Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming State Tax Treatment of entity that elects to be an IC-DISC nontaxable .follows federal nontaxable .follows federal nontaxable .follows federal nontaxable .follows federal nontaxable .follows federal taxable as ordinary corporation nontaxable .State treatment of IC‐DISC (specific rules of each state need to be analyzed further) State Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Ilinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri State Tax Treatment of entity that elects to be an IC-DISC nontaxable .follows federal taxable as ordinary corporation taxable as ordinary corporation taxable as ordinary corporation nontaxable .follows federal nontaxable .follows federal taxable as ordinary corporation nontaxable .follows federal nontaxable .follows federal No tax taxable as ordinary corporation taxable as ordinary corporation nontaxable .follows federal nontaxable .follows federal nontaxable .follows federal taxable as ordinary corporation (special rules) taxable as ordinary corporation taxable as ordinary corporation taxable as ordinary corporation nontaxable .follows federal taxable as ordinary corporation nontaxable .follows federal taxable as ordinary corporation nontaxable .follows federal taxable as ordinary corporation No tax 18 .follows federal nontaxable .follows federal nontaxable .
On‐going Compliance • Hold Board of Directors and Shareholder meeting in state of incorporation (e.g. adopt corporate resolutions to declare dividends) • Record commissions received • Maintain books and records • File Form 1120‐IC‐DISC with IRS • File appropriate state tax returns • Ensure IC‐DISC rules are satisfied! – The above is not intended to be a comprehensive listing 19 .
nor have we performed services that rise to this level of assurance.IRS Circular 230 Disclosure As a result of perceived abuses. These Circular 230 regulations require all accountants to provide extensive disclosure when providing certain written tax communications to clients. the Treasury has recently promulgated Regulations for practice before the IRS. including any attachments. we would like to inform you that any advice given in this presentation. In order to comply with our obligations under these Regulations. because we have not included all of the information required by Circular 230. cannot be used to avoid penalties which the IRS might impose. .