VIEWpoint Issue 2 | 2018
Tax Cuts and Jobs Act – Highlights of What is Ahead for You...
VIEWpoint Issue 3 | 2017
Dental Practice Year-End Tax Planning Tips
Don’t Forget About Your Required Minimum Distribution
Negotiating Your Letter of Intent in the M&A Process
In a world of multi-lateral trade pacts, there are few remaining benefits available for U.S. exporters, yet an Interest Charge-Domestic International Sales Corporation (IC-DISC) is the gift that keeps giving. Despite it’s more than 45-year history offering tax breaks to our domestic exporters, many businesses today still fail to take full advantage of all the benefits of the governmental ‘freebies’ given to IC-DISCs.
Typically established by the business owners as a brother-sister entity to the operating business, an IC-DISC offers tax benefits derived from transferring export profits on U.S. goods from the operating company to the IC-DISC. The IC-DISC is not taxable, but is required to distribute its earnings to its shareholders who recognize the distributions as taxable dividend income. As such, the owners receive cash from business operations at a tax rate of 23.8 percent (the qualified dividend rate) and the operating company’s taxable profits are reduced by the amount of dividends paid to the owners.
Depending on the nature of the operating business the tax benefit can vary, but 20 percent is a fairly normal tax savings. Most companies choose to transfer either 4 percent of the export revenue or 50 percent of the export profits. To increase your IC-DISC benefits, consider these five additional tax-savings approaches:
Time the dividend so it falls in the year following the transferred profit. This will increase the benefit from the tax rate differential by adding a tax deferral. Since the IC-DISC will continue to operate in future years, the tax deferral becomes recurring until the owner exits the business.
Use transfer pricing instead of the typical 4 percent commission. Historically overlooked, the transfer-pricing alternative increases the profit transfer. This can be achieved by moving intangible and intellectual property (customer lists and patent rights) to the IC- DISC the same way large multi-national companies shift profits overseas. The use of personal goodwill, which has been the focus of planning for privately-held C corporations involved in an acquisition, can also be utilized for an IC-DISC to increase its tax benefits by using established transfer-pricing rules.
For companies in the distribution business, transfer the foreign customer relationships to the IC-DISC. Have the IC-DISC purchase goods from a third-party U.S. manufacturer and sell them directly to the foreign customer. Transfer-pricing rules do apply. Generally, the IC-DISC will not be able to retain the entire profit if the operating company provides sales support, but it is likely better than 4 percent.
This structure allows the Roth to overcome limitations on annual contributions. Each year the Roth principle is increased by the IC-DISC earnings. Although, the Roth will be required to pay taxes on the transferred profits, it won’t be required to pay taxes on the future earnings derived from those profits.
Although there is a limitation on the amount of profit that can be transferred to the IC-DISC, there is no floor. Since the transfer amount is based on revenues instead of profits, the formula can create a stable annual transfer to the IC-DISC. The retired executives will receive income taxed as a qualified dividend, and the company will obtain a tax deduction at its normal business tax rate.
As trade becomes increasingly global, the IC-DISC structure will be more and more useful to U.S. exporters. If you’re in the business of exporting overseas and not taking full advantage of what an IC-DISC has to offer — you are likely missing out. Contact our international tax advisors to learn if your organization qualifies, gain assistance in getting an IC-DISC set-up and maximize your tax savings.
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