The days of a U.S. positive trade balance are far behind us. The second half of the twentieth century saw trade increase more than three times faster than the GDP, mainly from import rather than export, resulting in an enormous trade deficit.
While our leaders in Washington rarely agree on policy, they do, however, agree that strengthening our manufacturing sector and encouraging exports is paramount to helping our nation out of its economic crisis. As early as 1971, Congress recognized the need for export tax benefits as a way to remain internationally competitive. That year they passed the Interest Charge – Domestic International Sales Corporation Legislation (IC-DISC). However, it wasn’t until 2003, with corporate tax reform legislation, that tax benefits really kicked into gear for the anemic U.S. manufacturing industry and multinationals with significant operations abroad.
The IC-DISC provides U.S. exporters and their shareholders permanent tax savings—20 percent of net export income. This is how it works:
- A U.S. exporter or shareholder(s) forms and IC-DISC that is owned by the shareholders of the corporation.
- The U.S. exporter pays IC-DISC a commission.
- The exporter deducts the commission from income generated tax savings at an estimated regular tax rate of 35 percent.
- The qualifying IC-DISC pays no U.S. income tax on the commission income.
- The commission income is accumulated in the IC-DISC and remains untaxed until the IC-DISC decides to pay a dividend to its shareholders at the lower preferred qualified dividend tax rate of 15 percent.
- The result is a 20 percent tax savings.
Fantastic for those businesses aware that the incentive exists – usually the traditional manufacturing/exporting companies. Unfortunately, if you don’t know about the tax credit, you can’t reap the benefit. There are a number of companies and businesses that have no idea they fall into this category. The reason? They don’t consider what they do as exporting. The following is a list of those businesses that may be eligible to take advantage of the incentive:
- Distributors of exported U.S. made goods.
- Architectural or engineering firms that perform services inside or outside of the U.S. associated with an actual or proposed foreign construction project.
- Software developers with software licensed for reproduction outside of the U.S.
- Companies involved with agriculture or mineral products grown or extracted in the U.S. for export.
- Companies that purchase U.S. made products which are ultimately used outside of the U.S.
- Companies that manufacture or distribute components that are exported for further manufacturing.
- Companies that lease U.S. made or refurbished equipment, new or used, to a third party for use outside of the U.S.
A word of caution: the IC-DISC is more complex than it seems on paper. If you choose to investigate whether your company qualifies for this export tax benefit, make sure you engage a qualified professional with a solid background and experience to guide you through, what can ultimately be, a very profitable endeavor.
Contact Allan Peiser, CPA at 214-635-2503 or fill in the form below.
Allan Peiser, Managing Partner of Goldin Peiser & Peiser, LLP demonstrates a depth of expertise and enthusiasm for finding creative tax and financial solutions for businesses. He has participated in numerous merger and acquisition transactions combining a knowledge of tax and business law with extensive and direct practical experience. A seasoned professional, Allan assists clients in determining the optimal business structure, which usually involves a complex variety of factors. His initiative, leadership and responsiveness have been instrumental in assisting clients in various business challenges and opportunities.
Goldin Peiser & Peiser, LLP will be holding a RoundTable on IC-DISC: Export Tax Benefits (IC-DISC) and How They Can Work For You, on Wednesday September 21, 2011 at its office, 17742 Preston Rd., Dallas, TX 75252 from 11:30 a.m. – 1:00 p.m. There is no cost to attend; lunch will be served. To make a reservation, contact Debbie Ames or email at firstname.lastname@example.org.