Dana S. Beane & Company, P.C. Income Tax Based Export Incentive IC DISC.

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Presentation transcript:

Dana S. Beane & Company, P.C. Income Tax Based Export Incentive IC DISC

Stands For: Interest Charge Domestic International Sales Corporation All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

3 History and Background Fundamentally unchanged since 1971 Internal Revenue Code - Tax based export incentive It has passed the scrutiny of the World Trade Organization All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

4 Tax Advantages: The IC-DISC is a tax exempt entity. Internal Revenue Code Sec. 991 Taxation of a domestic international sales corporation -- For purposes of the taxes imposed by this subtitle upon a DISC (as defined in section 992(a)), a DISC shall not be subject to the taxes imposed by this subtitle. All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

5 Qualified export income is income tax exempt. Undistributed income may be lent back to manufacturer for working capital needs. Dividends received from the IC DISC are taxed to the shareholder at capital gain rates, 15% or 20%. The capital gain rate for dividends was made permanent as part of the American Taxpayer Relief Act of All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

6 If you are in one of the top tax brackets, you can convert income that would ordinarily be taxed at 35% or 39.6% to income taxed at 15% or 20%. All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

7 Tax Saving Example: If foreign sales are $4,200,000, the producer pays the IC DISC a commission of 4% of Foreign Trade Gross Receipts (FTGR) or 50% of FTGR taxable income, whichever is higher. If we use 4% of sales, the commission would be $168,000. At a 35% tax rate the producer would save $58,800 as a result of the commission expense. Assuming a 15% rate on dividend income, the shareholder would owe $25,200 of tax upon receiving a dividend of $168,000. The net tax savings is 20%, $33,600 [58,800-25,200]. All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

8 In our example, it is assumed that all of the commission amount is paid out as a dividend at the end of the taxable year. After paying 15% tax, the shareholders net, after tax, $142,800 ($134,400 if 20% rate applies.) All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

9 Simply Stated: The IC DISC incentive allows certain US exporters to convert ordinary income taxed at 35% and 39.6% into dividend income taxed at 15% and 20%, a 20% income tax savings. All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

10 IC DISC Formation Flexibility: A subsidiary of the US exporter Owned by the shareholders of US exporter Subsidiary of a partnership or other pass through entity All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

11 Qualifying Exports:To qualify for the export benefit, the IC DISC must deal with the property which is export property which meets 50% US content requirement and foreign destination test.In addition to tangible property, export property may also include engineering and architectural services related to construction projects outside the U.S.Sales to the US Government are excluded. All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

12 State Tax Considerations: May be advisable to establish as a Delaware or Nevada corporation to avoid state taxes. Some states follow federal law resulting in a savings of income taxes on both the federal and state tax levels. All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

13 Summary: Shareholders of the IC DISC can receive dividends subjected to only 15% or 20% capital gain tax rate. The commission can be deferred from current taxation for up to $10 million in FTGR and used to advance exports (deferment results in an interest charge.) The commission may be lent back to the US exporter. Affordable Health Care Act taxes apply. All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.

14 Dana S. Beane & Company, PC Since 1947, designing and implementing business transactions that incrementally build wealth. or All Original Content © Dana S. Beane & Company, P.C. All Rights Reserved.