1. An Independent Member of Baker Tilly International 1 IC-DISC Interest Charge – Domestic International Sales Corporation & Federal Tax Kevin Heyde, CPA Kentucky Export Initiative Ready, Set, Export!

2. An Independent Member of Baker Tilly International 2 Today’s Objectives 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” Federal Tax 2

3. An Independent Member of Baker Tilly International 3 Should Your Company Consider an IC-DISC? Does your company export products? Would my company and shareholders benefit from an IC-DISC? Are products exported produced, grown or extracted from U.S. source (new or used) majority content of US value (>50% value U.S.)? Does your company provide services e.g. engineering or architectural services for construction project outside of U.S.? Is your company a pass through entity such as an S-Corporation or Partnership or a closely held C-Corporation? 3

4. An Independent Member of Baker Tilly International 4 Qualified Export Receipts & Export Property “Export Property” is property: – Manufactured, produced, grown, or extracted in the U.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.S. Selling price - $100,000 Cost of imported materials included in property sold - $50,000 Percent of Foreign content - 50% 4

5. An Independent Member of Baker Tilly International 5 IC-DISC Tax Savings & Benefits IC-DISC is exempt from federal income tax Exporter (Supplier) deducts commission paid to IC-DISC, i.e. reducing taxable income flowing to shareholders taxed at 35%, tax savings re: deduction IC-DISC pays dividend to its shareholders which is taxed at federal capital gains tax rate max. 15% Net federal tax savings to shareholders on commission deduction vs. dividend income (35% vs. 15%) yields 20% Annual deferral of federal income tax on up to $10,000,000 qualified gross receipts Potential for state and local tax savings Potential Estate & Gift Planning opportunities 5

6. An Independent Member of Baker Tilly International 6 Example of Tax Savings S-Corporation with no IC-DISC S-Corp with IC-DISC DomesticExportTotal DomesticExportTotalDividend Sales6,000,0002,000,0008,000,000 6,000,0002,000,0008,000,000 Taxable Income before Commission (1) 600,000120,000720,000 600,000120,000720,000 Commission expense 50/50 method 80,000 Net federal taxable Income after Commission600,000120,000720,000 600,00040,000640,000 Shareholder Level Federal Tax at 35%210,00042,000252,000 210,00014,000224,000 Federal Tax on IC-DISC Dividend 15% 12,000 Tax to shareholder210,00042,000252,000 210,00014,000224,00012,000 After Tax Cash available to shareholder468,000 484,000 (I)(II) Minimum Federal Tax Savings (II) less (I)16,000 Footnote: (1) greater of (A) or (B) (A) 4% of Qualified export receipts ($2,000,000 * 4%)80,000 (B) 50% of export taxable income from export sales ($120,000 * 50%)60,000 6

7. An Independent Member of Baker Tilly International 7 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 IC-DISC distributes commission income earned to shareholders via a qualified dividend or possibly loaned back to Supplier – IC-DISC shareholders pay federal tax at capital gains rate maximum rate 15% (currently for 2011 and 2012) – Dividend not paid subjects deferred income to interest charge, currently.0034 of tax on deferred income Tax return is filed on or before 15 th day of ninth month following year end 7

8. An Independent Member of Baker Tilly International 8 IC-DISC Owned Directly by Flow Through Entity Business Profits & Dividends taxed to Shareholders Individuals S Corporation IC-DISC 100% Dividend Exports Sales Commission 100% Non-US Customer Non-US Related Customer 8

9. An Independent Member of Baker Tilly International 9 Ownership Directly by Individuals Commission Individual A Individual B Individual B Exporter Supplier USCo IC-DISC USCo Individual A Profits net of Commissions Dividends Non-US Customer Non-US Related Customer Sales 9

10. An Independent Member of Baker Tilly International 10 Basics Have same tax year as primary shareholder Maintain its own set of books and records Have its own Bank Account Bank account minimum balance $2,500 Export sales prior to incorporation, capitalization and election to be treated as an IC-DISC do not qualify for IC- DISC benefit Hold Board of Directors and Shareholder meeting in state of incorporation (e.g. adopt corporate resolutions to declare dividends or possibly to loan cash back to Supplier) 10

11. An Independent Member of Baker Tilly International 11 Computation of Interest Charge 20092010 Prior Year Current Year DISC Taxable income and earnings and profits for the year $ 150,000 Actual distributions during current tax year $ (60,000) Accumulated DISC income - end of year $ 120,000 $ 210,000 Calculation of interest charge: Accumulated DISC income prior year $ 120,000 Calculation of Excess Current year distributions Current year income $ 150,000 Current year distributions $ (60,000) Excess Current year distributions (negative) $ - Current year deferred DISC taxable income $ 120,000 Assumed deferred tax liability @ 35% $ 42,000 Interest charge using current year Base Period T-Bill Rate 2010 0.0034 "INTEREST CHARGE" paid by shareholder on individual return (deductible interest) $ 143 11

12. An Independent Member of Baker Tilly International 12 An Independent Member of Baker Tilly International General Federal Tax 12

13. An Independent Member of Baker Tilly International 13 Federal Taxes State of uncertainty Need to address deficit and high unemployment Questionable if any significant tax legislation will pass before the 2012 election – Obama’s September 8 th,2011 address to joint session of Congress –White House Jobs package sent to Congress September 12, 2011 13

14. An Independent Member of Baker Tilly International 14 Expiring Tax Credits - December 31, 2011 Research - 20% of qualified research expenditures Work Opportunity (WOTC) – Up to 40% of 1 st year wages up to $6k per employee, $12k qualified veterans, and $3k qualified summer youth employees. Where employee is a long-term family assistance (LTFA) recipient, WOTC is a percentage of 1 st and 2 nd year wages, up to $10k per employee. Differential Wage Payment for Employers – Eligible small business employers that pay differential wages (payments to employees for periods that they are called to active duty, uniformed services, more than 30 days) 14

15. An Independent Member of Baker Tilly International 15 Tax Considerations for Manufacturers Research and Development Tax Credit Inventory valuation – UNICAP – Uniform Capitalization of Costs Domestic Production Activities Deduction Depreciation – Cost Segregation Study Multi-state tax issues – Nexus Sales & Use taxes 15

16. An Independent Member of Baker Tilly International 16 Questions?

17. An Independent Member of Baker Tilly International 17 IRS Circular 230 Disclosure As a result of perceived abuses, the Treasury has recently promulgated Regulations for practice before the IRS. These Circular 230 regulations require all accountants to provide extensive disclosure when providing certain written tax communications to clients. In order to comply with our obligations under these Regulations, we would like to inform you that any advice given in this presentation, including any attachments, cannot be used to avoid penalties which the IRS might impose, because we have not included all of the information required by Circular 230, nor have we performed services that rise to this level of assurance.

18. An Independent Member of Baker Tilly International 18 Thank You! Kevin Heyde, CPA Kevin.Heyde@mcmcpa.com 888.587.1719 www.mcmcpa.com 18