CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS.
If no column is present: click Bookmarks or Pages on the left side of the window.
If no icons are present: Click View, select Navigational Panels, and chose either Bookmarks or Pages.
If you need assistance or to register for the audio portion, please call Strafford customer service at 800-926-7926 ext. 10
IC-DISC: Mastering Intricacies of the Federal Tax Incentive for Exporters
Overcoming Compliance Challenges to Maximize Tax Benefitspresents
Today's panel features:Robert J. Misey, Shareholder, Reinhart Boerner Van Deuren, Milwaukee
Neal Block, Partner, Baker & McKenzie, ChicagoJerry Ogle, President, Ogle International Tax Advisors, Bradenton, Fla.
Wednesday, July 15, 2009
The conference begins at:1 pm Eastern12 pm Central
11 am Mountain10 am Pacific
The audio portion of this conference will be accessible by telephone only. Please refer to the dial in instructions emailed to registrants to access the audio portion of the conference.
A Live 90-Minute Webinar/Audio Conference with Interactive Q&A
IC-DISC: The Federal Tax Incentive For Exporters
WebinarJuly 15, 2009
Maximizing Tax Savings For Exporters With An IC-DISC
Robert J. Misey, Jr.Reinhart Boerner Van Deuren s.c.
\2796051
2
Requirements For An IC-DISC
• An IC-DISC must be a U.S. corporation with a single class of stock
• The IC-DISC stock must have a minimum par value of $2,500
• The U.S. corporation elects to be an IC-DISC by filing a Form 4876-A– For an existing corporation to elect IC-DISC status, the
Form 4876-A must be filed during the 90 days preceding the first day of the corporation’s taxable year
– For a newly-formed corporation, the Form 4876-A must be filed within 90 days after the beginning of the corporation’s first taxable year
3
Taxation Of An IC-DISC And Its Shareholders
• An IC-DISC is not subject to the regular U.S. corporate income tax. As a result, the IC-DISC does not pay tax on the commission received from the manufacturing entity– When the IC-DISC pays a dividend to its owners, the owners will
pay tax at a 15% rate. In effect, the owners are converting a 35% tax on income, representing the amount of the commission for a 15% individual tax
– If the manufacturing entity is a flow-through entity, such as an S corporation, partnership or most limited liability companies (“LLCs”), the reduction in tax is 20 percentage points
– If the manufacturing entity is a C corporation, the reduction in tax is 29.75 percentage points
4
US
IC-DISCManufacturing Exporter
U.S.
Foreign
Exports
commission
dividend
US
IC-DISCManufacturing Exporter
U.S.
Foreign
Exports
commission
dividend
5
The Tests To Qualify As An IC-DISC
• To qualify as an IC-DISC, the domestic corporation must pass both the qualified export receipts and qualified export assets tests
• The qualified export receipts test states that 95% of the gross receipts of the IC-DISC must constitute qualified export receipts – Qualified export receipts include gross receipts from sales of
export property, rents for the use of export property outside the U.S., services related to export sales, engineering or architectural services for construction projects, and commissions thereon
6
Example 1: Uncle Sam wholly-owns USAco, an S corporation that manufactures widgets. Due to burgeoning export sales, Uncle Sam forms an IC-DISC whose only activity results in receiving commissions on qualified export receipts. Because 100% of the IC-DISC’s gross receipts constitute qualified export receipts the IC-DISC satisfies the gross receipts test
US
IC-DISCUSAco
U.S.
Foreign
Exports
commission
dividend
US
IC-DISCUSAco
U.S.
Foreign
Exports
commission
dividend
7
Example 2: Uncle Sam, who wholly-owns USAco, an S corporation that manufactures and exports widgets, also sells maintenance service contracts for widgets to those same foreign customers. The gross receipts from those maintenance service contracts constitute qualified export receipts
US
IC-DISCUSAco
U.S.
Foreign
Services
commission
dividend
US
IC-DISCUSAco
U.S.
Foreign
Services
commission
dividend
8
Example 3: Uncle Sam wholly-owns USAco, an S corporation that is an architectural firm. USAco's specialty is designing drive-in wedding chapels that are built in Europe. The receipts from the designs constitute qualified export receipts
US
IC-DISCUSAco
U.S.
Foreign
Architectural Designs
commission
dividend
US
IC-DISCUSAco
U.S.
Foreign
Architectural Designs
commission
dividend
9
• The qualified export assets test states that 95% of the assets of the corporation must be qualified export assets– Qualified export assets include accounts
receivable, temporary investments, export property and loans to producers
10
Example 4: Uncle Sam wholly-owns USAco, an S corporation that manufactures widgets. Uncle Sam capitalizes an IC-DISC with $2,500 of cash, and the IC-DISC receives a commission during the year of $10,000 that is put in a checking account before being distributed on the last day of the year as a dividend. Because the $2,500 cash remaining constitutes working capital to meet the needs of potential creditors, the $2,500 is a temporary investment, and 100% of the IC-DISC’s assets constitute qualified export assets. Consequently, the IC-DISC passes the qualified export assets test
11
US
IC-DISCUSAco
U.S.
Foreign
Exports
$10,000 commission$2,500 par value
$10,000 dividend
US
IC-DISCUSAco
U.S.
Foreign
Exports
$10,000 commission$2,500 par value
$10,000 dividend
Example 4 (Cont.)
12
Example 5: Uncle Sam wholly-owns USAco, an S corporation that manufactures widgets. Due to burgeoning export sales, Uncle Sam forms an IC-DISC, which acts as a buy-sell IC-DISC (buying widgets from USAco and selling them to foreign customers). Assuming that the widgets constitute export property, any widgets remaining in inventory at year-end constitute qualified export assets, and 100% of the IC-DISC’s assets constitute qualified export assets. Consequently, the IC-DISC passes the qualified export assets test
13
US
IC-DISCUSAco
U.S.
Foreign
Exports
widgets
dividend
US
IC-DISCUSAco
U.S.
Foreign
Exports
widgets
dividend
Example 5 (Cont.)
14
Example 6: Uncle Sam forms an IC-DISC that receives commissions on qualified export receipts. The IC-DISC, rather than distribute a dividend to Uncle Sam, takes the cash representing the commissions and loans the cash back to USAco. Because loans to producers, such as to the widget-manufacturing USAco, constitute qualified export assets, 100% of the IC-DISC's assets constitute qualified export assets. Consequently, the IC-DISC passes the qualified export assets test
15
Example 6 (Cont.)
US
IC-DISCUSAco
U.S.
Foreign
Exports
loan
dividend
commission
US
IC-DISCUSAco
U.S.
Foreign
Exports
loan
dividend
commission
16
Qualification As Export Property
• There are three requirements for an IC-DISC to receive income from a sale of export property:– The property must be manufactured, produced, grown
or extracted in the U.S. by a party other than the IC-DISC
– The export property must be held primarily for sale, lease or rental for direct use, consumption or disposition outside the U.S.; and
– The export property must have a maximum of 50% foreign content
17
The Manufacturing Requirement
• Property is manufactured within the U.S. if either (a) conversion costs incurred in the U.S. constitute 20% of the cost of goods sold, (b) there is a substantial transformation in the U.S., or (c) the operations in the U.S. are generally considered to constitute manufacturing
18
Example 7: USAco sells lime-green leisure suits with wide white belts, an immensely popular product with those who patronize discos. In order to make these hideous-looking suits attractive to consumers, USAco packages them in gold-plated cardboard and plastic boxes and exports them for $100 a suit. USAco pays contract manufacturers in China $30 for each suit, but the gold-plated packaging adds $10 to the cost of goods sold. Because the$10 cost in the U.S. constitutes at least 20% (25%) of the total cost of goods sold of $40 ($30 + $10), USAco has conducted manufacturing
19
leisu
re su
its$3
0
IC-DISCUSAcocommission
US
Exports
gold-plated packaging
$10
Foreign
U.S.
packaged suits$100
dividend
leisu
re su
its$3
0
IC-DISCUSAcocommission
US
Exports
gold-plated packaging
$10
Foreign
U.S.
packaged suits$100
dividend
Example 7 (Cont.)
20
Example 8: USAco operates a metal processing shop. USAcopurchases steel rods and converts them to screws and nails. The conversion is a substantial transformation and, therefore, USAcohas manufactured the screws and nails
Exports
IC-DISCUSAcocommission
US
steel rods
Foreign
U.S.
Screws and nails
dividend
Exports
IC-DISCUSAcocommission
US
steel rods
Foreign
U.S.
Screws and nails
dividend
21
Example 9: USAco separately purchases the frames, wings, tinted lenses and little screws that can be combined to make sunglasses. USAco pays minimum wages to 11th grade dropouts who put together approximately 20 sunglasses each hour. Assuming that these conversion costs are less than 20% of the costs of goods sold, and there is a not a substantial transformation of the sunglass components in the sunglasses, manufacturing is satisfied only ifthis process is generally considered to constitute manufacturing
22
IC-DISCUSAcocommission
US
sunglass components
Foreign
U.S.
sunglasses
Exports
dividend
IC-DISCUSAcocommission
US
sunglass components
Foreign
U.S.
sunglasses
Exports
dividend
Example 9 (Cont.)
23
The Destination Requirement
• The export property must satisfy a destination test, which requires being held for sale, lease or rental in the ordinary course of business for direct use, disposition or consumption outside the U.S.– Property satisfies the destination test if it is delivered to
a freight forwarder for ultimate shipment abroad– Property also satisfies the destination test if it is sold to
a customer in the U.S., provided the property does not undergo further manufacturing by the purchaser prior to export, and the property is shipped to a foreign destination within one year
24
Example 10: USAco sells widgets to a widget distributor in Buffalo, N.Y. One of the Buffalo distributor’s biggest customers is a Toronto-based company. If properly documented, the widgets re-sold by Buffalo distributor to a Toronto-based company satisfy the destination test
Toronto Customer
IC-DISCUSAcocommission
US
Foreign
U.S.
Buffalo distributor
dividend
Toronto Customer
IC-DISCUSAcocommission
US
Foreign
U.S.
Buffalo distributor
dividend
25
Example 11: USAco sells widgets to a customer in Vancouver, B.C. After receiving the widgets in Canada, the Vancouver customer sends the widgets to its manufacturing plant in Seattle. Because the product has come back to the U.S. within 12 months, USAco has failed the destination test
Vancouver customer
IC-DISCExportercommission
US
Foreign
U.S.
Seattle plant
dividend
Vancouver customer
IC-DISCExportercommission
US
Foreign
U.S.
Seattle plant
dividend
26
Example 12: FAMILYco, a closely-held LLC, manufactures windshield wipers in the U.S. with U.S. materials. FAMILYco, through its IC-DISC, sells its windshield wipers to Big3co, a Detroit auto manufacturer, which affixes the windshield wipers to its new automobiles that are exported to Canada. The IC-DISC can benefit from the sale of its windshield wipers to Big3co only if affixing windshield wipers to automobiles is not further manufacturing
27
Foreign
U.S.
IC-DISC
Big3co
windshield wiperspayment
exports cars
commission
FAMILYco
H W
Foreign
U.S.
IC-DISC
Big3co
windshield wiperspayment
exports cars
commission
FAMILYco
H W
Example 12 (Cont.)
28
The Maximum 50% Foreign Content Requirement
• No more than 50% of the fair market value of export property may be attributable to the fair market value of articles imported into the U.S. The fair market value of the foreign content is determined by the dutiable value of any foreign components
29
Example 13: Willie, a U.S. citizen, wholly-owns PAPco, a manufacturer of paper products that is a C corporation. Due to burgeoning export sales, Willie forms an IC-DISC whose exporter receives $200 per paper product. The materials to manufacture the paper products are wood pulp, which is purchased from companies situated in the U.S., and kryptonite, which is purchased from a kryptonite mine in Mexico. The dutiable value of the kryptonite is $80 per paper product. Because the majority of the content constitutes materials purchased in the U.S., the paper products satisfy the content requirement. However, should the cost of kryptonite ever rise to the extent that it exceeds 50% of the value of the paper products, the paper products would have too much foreign content and would not qualify as export property
30
krypto
nite
IC-DISCPAPcocommission
Paper products exports$200
wood pulp
Foreign
U.S.
$80
WUS
dividend
krypto
nite
IC-DISCPAPcocommission
Paper products exports$200
wood pulp
Foreign
U.S.
$80
WUS
WUS
dividend
Example 13 (Cont.)
31
Implementation Considerations For The IC-DISC
• Execution is critical to ensure that the IC-DISC and the export sales qualify for this benefit– Incorporate the IC-DISC before the export sales begin and make a $2,500
capital contribution– Analyze export assets and gross export receipts, which can include sales to
distributors – Analyze the manufacturing, destination and content requirements for export
property– Draft the commission agreement between the IC-DISC and the exporter– Prepare and file the Form 4876-A that elects IC-DISC status for the
corporation– Prepare a manual that contains guidelines for the client’s operating
procedures that includes a checklist/calendar to determine when the client should complete various activities, such as when the client should determine that the IC-DISC has satisfied the gross receipts test and the export assets test.
Your Trusted Tax Counsel
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.
IC-DISC: The Federal Tax Incentive For Exporters
WebinarJuly 15, 2009
IC-DISC Ownership Structures
Neal J. BlockBaker & McKenzie LLP (Chicago)[email protected]
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Overview Of Presentation
2
• Privately-held company: C, S, LLC, partnership
• Publicly-traded corporation
• Individual Retirement Account (IRA) and Roth IRA
• Estate planning, executive compensation
• Treaty benefits
• Sourcing benefits
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
C Corporation• Dividends subject to corporate tax at approximately 35%
• Recommended that IC-DISC be owned directly by the shareholders of the C corporation so they can avoid double taxation and possiblyreceive dividends at 15% rate.
Privately-Held Company
,,
3
U.S. – C Corp Exporter
(Related Supplier)
IC-DISC Commission
35%
IC-DISC
Individual Shareholders
IC-DISC Dividend 15%
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Privately-Held Company
4
S Corporation and LLC• Dividends pass through the corporation to the shareholders and are
deferred from taxes and possibly taxed at the 15% rate
IC-DISC Commission 35%
IC-DISC
U.S. Exporter(S Corp.)
Capital Gains Dividend – 15%
Individual Shareholders
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Partnership Owned by S Corporation• Dividends pass through the partnership to the partners and
shareholders of the S corporations and possibly taxed at the 15%rate.
IC-DISC
15% Div.
Partnershipsand/or S Corps
Privately-Held Company
5
Individuals
35% Commission Deduction
Deemed Exporter
Exporting Partnership
Deemed Exporter
C Corp ETI
Public Shareholders
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Publicly-Traded Corporation - Deferral
6
IC-DISC Receivables & Commission
IC-DISC
Up to $10 Million Deferred
C CORP
Up To $10 Million Deduction
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Publicly-Traded Corporation
7
• IC-DISC may defer from taxation 16/17 of best $10 million of gross receipts. The balance is deemed distributed to its shareholders
• Large exporters that generate substantial export receivables can sell the receivables to the IC-DISC at a discount. The discount income qualifies as qualified export receipts
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Publicly-Traded Corporation
8
• Deferred income becomes a low-cost, pre-tax source of funds for export working capital and financing international sales
• As much as $10 million may be generated from discount income and 16/17 deferred from tax, i.e., $1 of discount income = $1 of gross receipts
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Example I
Assume:
An IC-DISC owned by a “C” Corp. in 2004 receives commissions for export sales and earns discount income from factoring export receivables of $8 million. It earns a 20% or $.4 million commission on the best $2 million of sales. The IC-DISC is tax exempt and is allowed to retain income attributable to the best $10 million of gross receipts. The balance of gross receipts over $10 million is deemed distributed to the IC-DISC’s shareholders as a dividend. Use of the IC-DISC results in a $2.77 million tax savings as follows:
Publicly-Traded Corporation
9
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Example I (cont.)
Discount income $ 8.00 millionCommission on best $2 million of sales .40 million
Total IC-DISC income before deemed distribution $ 8.40 million
Less 1/17 deemed distribution .50 million
Total income to be retained $ 7.90 million
Tax Savings @ 35% $ 2.77 million
Publicly-Traded Corporation
10
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Example I (cont.)
Interest charge imposed on IC-DISC shareholder on tax savings (based upon One Year Treasury Bill rate)
Assume tax savings in 2007 $ 2.77 millionInterest rate on One Year Treasury Bill
in Sept. 2008 4%
Interest charge payable when IC-DISCshareholder’s 2008 return due (2009) $ 110,800 Tax
benefit from interest deduction -$55,400 @ 35% 38,780
Net cost of interest charge $ 72,020
Publicly-Traded Corporation
11
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Example II
MAXIMUM BENEFIT FROM DISCOUNT INCOME
Assume:
$10 million of discount income $10.00 millionLess 1/17 deemed distribution .85 million
Net $ 9.15 million
Publicly-Traded Corporation
12
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Example II (cont.)
Tax benefit $10 million @ 35% $ 3.20 million
Interest Charge:
$3.2 million saved at 4% $ 128,000
Tax benefit from interest deduction – $128,000 @ 35% 44,800
Net cost of interest charge $ 83,200
Publicly-Traded Corporation
13
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
BeneficiaryRoth IRA – 0 Tax
Regular IRA – Regular Tax
IRA
C CORPC CorporateTax Rates on
IC-DISC Dividends
IC-DISC
Corporate Tax Rateson IC-DISC Dividends
0 Taxon C Dividends
14
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
IRA IC-DISC BenefitsUse Of C Corp To Own IC-DISC Stock
15
• Allows dividends from IC-DISC to be taxed to C corporation at corporate rates of 15% - 35%
• Dividends from C corporation to IRA tax-free
• Assets invested by IRA tax-free
• Distributions taxed when distributed by regular IRA distributions tax free when distributed by Roth IRA
• May be combined with IRS direct ownership of IC-DISC stock
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
IRA IC-DISC BenefitsIRA Ownership Of IC-DISC
16
• Accumulated IC-DISC income taxed at corporate rates 15-35% when distributed
• Assets in IRA invested tax-free
• Multiple IRA structure could reduce total tax on IC-DISC dividends
• Use of LLC owned by IRA to avoid custodian involvement
• Roth IRA distributions not taxed to beneficiaries
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Estate Planning And Executive Compensation
17
• Estate planning: Ownership of IC-DISC stock in different proportions than exporting company stock can remove IC-DISC dividends from estate. Rev. Rul. 81-54 may result in gift tax exposure
• Executive compensation and succession: IC-DISC dividends can be paid to designated employees who own IC-DISC stock but do not have to be the same shareholders of the parent company. May avoid safe harbor pricing requirements. Can be used as a parent stock purchase plan
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Foreign International Sales Corporation(FISC)
18
• FISC: Owned more than 50% by IC-DISC
• FISC Dividends: Qualified IC-DISC export receipts [count towards best $10 million of gross receipts]
• Generally same activities qualify as IC-DISC regarding export property and related and subsidiary services
• 95% qualified export assets and gross receipts tests
• No safe harbor pricing
• Recommend when qualifying activities subject to low tax and otherwise would be subpart F income
IC-DISC
FISC
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Treaty Country Corporation Structure
19A
Treaty Country Corp.
DISC Related Supplier
Div. @ Treaty
W/H Rate(5% or less)
Commission35% deduction
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Treaty Benefits(Ownership Of A DISC By A Treaty Country Corporation)
19B
• Section 996(g) classifies IC-DISC dividends as effectively connected with the conduct of a trade or business in the U.S. through a permanent establishment. This would likely result in foreign corp. shareholder of a DISC being subject to tax on DISC dividends at up to 35% tax
• Section 996(g) is in conflict with most treaties which prevent taxation of a treaty country corporation in the absence of an actual permanent establishment, i.e., the mere existence of a U.S. subsidiary is not sufficient for U.S. taxation of dividends to parent as effectively connected income through a permanent establishment
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Treaty Benefits(Ownership Of A DISC By A Treaty Country Corporation)
(Cont.)
19C
• Under the later-in-time theory, treaties executed after June 1984, therefore, may prevent 996(g) from applying
• IC-DISC dividends may thus be subject to 0 tax or taxed at treaty rate on dividends
• If foreign owner of DISC is an individual, the 15% tax rate on DISC dividends should apply even if no treaty benefit
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
Sourcing Benefits
20
• Section 861(a)(1)(D) treats IC-DISC dividends attributable to qualified export receipts as foreign source income to U.S. shareholders
• IC-DISC dividends are presently in a separate basket (Section 904(d))
• Opportunity exists to put foreign taxes into IC-DISC to create foreign source income:
(a) From U.S. title passage
(b) From FISCs
©2009 Baker & McKenzie LLP
The Interest Charge Domestic International Sales Corporation
THANK YOU
Neal J. BlockBaker & McKenzie LLPOne Prudential Plaza
130 East Randolph DriveChicago, Illinois 60601 (312) 861-2937 (312) 698-2068
Baker & McKenzie LLP is a member of Baker & McKenzie International, a Swiss Verein
North American Tax Practice GroupYour Trusted Tax Counsel
Miami OfficeWaterford Business ParkMiami, Florida 33126(T) 305.671.3179 (F) 305.402.0552
Corporate Office8130 Lakewood Main St, Suite 208Bradenton, Florida 34202(T) 941.361.1147 (F) 941.827.9929
For more information on our servicesPlease contact us at our offices or visit us at our websitewww.ogleintltax.com
IC-DISC: The Federal Tax Incentive For Exporters Webinar
July 15, 2009
Pricing Rules And Annual Compliance
Jerry E . Ogle, CPA, [email protected] 15, 2009
Ogle International Tax Advisors offers IC DISC consulting services.In addition, our spectrum of international tax services can provide assistance in the areas of :
Foreign business investments -structure active business investments in offshore subsidiaries to minimize U.S. and host country taxation. Analysis of the U.S. CFC and PFIC rules for individual investors.
Offshore profits importing -plan for the repatriation of active foreign profits.
Foreign tax systems -analyze host country deductions, exemptions, and incentives, including foreign tax credits with host country tax advisors.
Miami OfficeWaterford Business ParkMiami, Florida 33126(T) 305.671.3179 (F) 305.402.0552
Corporate Office8130 Lakewood Main St, Suite 208Bradenton, Florida 34202(T) 941.361.1147 (F) 941.827.9929
For more information on our servicesPlease contact us at our offices or visit us at our websitewww.ogleintltax.com
An IC-DISC can act as a buy-sell entity or as a commission-based entity
In any event, the transfer price between the IC-DISC and related supplier must be calculated under one of the three following methods:
4% gross receipts
50% combined taxable income (CTI)
Section 482
2
Miami OfficeWaterford Business ParkMiami, Florida 33126(T) 305.671.3179 (F) 305.402.0552
Corporate Office8130 Lakewood Main St, Suite 208Bradenton, Florida 34202(T) 941.361.1147 (F) 941.827.9929
For more information on our servicesPlease contact us at our offices or visit us at our websitewww.ogleintltax.com
Under both the 4% gross receipts and 50% CTI methods, the DISC does not need to perform any economic functions or have any employees
Under both the 4% gross receipts and 50% CTI methods, the DISC can increase its commission by 10% of its export promotion expenses (EPEs) if the DISC is a buy-sell DISC versus a commission DISC [Reg. 1.994-1(a)(2) and Computervision Corp v. Commissioner (96 T.C. 652)]
EPEs include general administrative and selling expenses, certain freight paid to U.S.-flagged carriers, packaging costs, and design and label costs for export products incurred by the DISC
(Note: EPEs paid by a related party can qualify if a contract existed between the related parties, earmarking the EPEs for the buy-sell DISC before the transaction took place)
3
Miami OfficeWaterford Business ParkMiami, Florida 33126(T) 305.671.3179 (F) 305.402.0552
Corporate Office8130 Lakewood Main St, Suite 208Bradenton, Florida 34202(T) 941.361.1147 (F) 941.827.9929
For more information on our servicesPlease contact us at our offices or visit us at our websitewww.ogleintltax.com
The pricing method chosen is required on a transaction by transaction (TxT) basis; however, an annual election can be made to group transactions in accordance with products or product lines
Neither the gross receipts method nor the CTI method may be applied in a way that causes, in any taxable year, a loss to the related supplier. There is a special rule that allows the 4% gross receipts method to apply when the overall profit percentage is not exceeded [Reg. 1.994-1(e)(1)(ii)]
4
Miami OfficeWaterford Business ParkMiami, Florida 33126(T) 305.671.3179 (F) 305.402.0552
Corporate Office8130 Lakewood Main St, Suite 208Bradenton, Florida 34202(T) 941.361.1147 (F) 941.827.9929
For more information on our servicesPlease contact us at our offices or visit us at our websitewww.ogleintltax.com
When utilizing the CTI method, overhead costs generally are allocated between export and domestic sales based on detailed rules (Reg. 1.861-8)
However, if the profit margin on export products is less than the profit margin on worldwide sales of the same products, then marginal costing rules may be applied to allocate only marginal or variable costs against export receipts under the CTI method (Reg. 1.994-2)
Overall, the CTI method generally produces a larger benefit than does the gross receipts method, when exports have a greater-than-8% profit ratio
5
Miami OfficeWaterford Business ParkMiami, Florida 33126(T) 305.671.3179 (F) 305.402.0552
Corporate Office8130 Lakewood Main St, Suite 208Bradenton, Florida 34202(T) 941.361.1147 (F) 941.827.9929
For more information on our servicesPlease contact us at our offices or visit us at our websitewww.ogleintltax.com
Related supplier income statement before IC-DISC commission
Domestic sales 300Export sales 100Domestic COGS (150)Export COGS (50)
GP 200
Overhead (100)
Taxable income 100 25%
6
Miami OfficeWaterford Business ParkMiami, Florida 33126(T) 305.671.3179 (F) 305.402.0552
Corporate Office8130 Lakewood Main St, Suite 208Bradenton, Florida 34202(T) 941.361.1147 (F) 941.827.9929
For more information on our servicesPlease contact us at our offices or visit us at our websitewww.ogleintltax.com
DISC commission calculationMethod 4% CTIExport 100 100COGS (50)
GP 50
Overhead (25)
Net income 25
Total commission 4 12.50
7
Miami OfficeWaterford Business ParkMiami, Florida 33126(T) 305.671.3179 (F) 305.402.0552
Corporate Office8130 Lakewood Main St, Suite 208Bradenton, Florida 34202(T) 941.361.1147 (F) 941.827.9929
For more information on our servicesPlease contact us at our offices or visit us at our websitewww.ogleintltax.com
Initial IC-DISC election is made on Form 4876-A within 90 days of the start of the taxable year (must be signed by all shareholders)
A Form 1120 IC-DISC is required to be filed annually on or before the 15th day of the ninth month following the close of the taxable year
Attached will be Schedule K, shareholder’s statement of IC-DISC distributions (indicates actual and deemed distributions that are taxable)
8
Miami OfficeWaterford Business ParkMiami, Florida 33126(T) 305.671.3179 (F) 305.402.0552
Corporate Office8130 Lakewood Main St, Suite 208Bradenton, Florida 34202(T) 941.361.1147 (F) 941.827.9929
For more information on our servicesPlease contact us at our offices or visit us at our websitewww.ogleintltax.com
A Form 8404 must be filed by all IC-DISC shareholders on or before the original due date of their tax returns (no extensions are permitted)
Form 8404 requires that any deferred interest related costs must be paid (estimated tax payments are not required on a quarterly basis)
Deferred interest is calculated on hypothetical tax based on ordinary rates vs. qualified dividend rates
Form 8404 anticipates that estimates are likely needed and amended procedures are outlined in form instructions
Various states have different state income tax filings required
9
Miami OfficeWaterford Business ParkMiami, Florida 33126(T) 305.671.3179 (F) 305.402.0552
Corporate Office8130 Lakewood Main St, Suite 208Bradenton, Florida 34202(T) 941.361.1147 (F) 941.827.9929
For more information on our servicesPlease contact us at our offices or visit us at our websitewww.ogleintltax.com
The DISC must make an initial estimate of the commission at the end of the year, and the related supplier must pay the commission within 60 days of the close of the year [Reg. 1.994-1(e)(3)(i)]
Reasonable estimate requires at least 50%Payment should generally be in cash to avoid non-compliance risk [TSI, Inc. v. U.S. (977 F.2d 424) and Thomas Int’l Ltd. v U.S. (773 F.2d 300)]True-up commission requires payment in 90 days
Some taxpayers have the related supplier pay the DISC commissions throughout the year, and the DISC makes corresponding distributions to DISC shareholders before detailed estimates are calculated
Caution should be used to not overestimate the commission and distributions
Failure to optimize available methods such as TxT, marginal costing, overhead allocation under CTI, EPE, and factoring of qualified export related accounts receivable (Rev. Rul. 75-430)
10
Top Related