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IC-DISC

Interest Charge – Domestic International Sales Corporation & Federal Tax

Kevin Heyde, CPA

Kentucky Export Initiative

Ready, Set, Export!

An Independent Member of Baker Tilly International

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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 An Independent Member of Baker Tilly International

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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?

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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% An Independent Member of Baker Tilly International

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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 An Independent Member of Baker Tilly International

Example of Tax Savings

Sales Taxable Income before Commission (1) Commission expense 50/50 method Net federal taxable Income after Commission Shareholder Level Federal Tax at 35% Federal Tax on IC-DISC Dividend 15% Tax to shareholder After Tax Cash available to shareholder S-Corporation with no IC-DISC Domestic Export Total 6,000,000 2,000,000 8,000,000 600,000 600,000 210,000 210,000 120,000 120,000 42,000 Minimum Federal Tax Savings (II) less (I) Footnote: (1) greater of (A) or (B) (A) 4% of Qualified export receipts ($2,000,000 * 4%) (B) 50% of export taxable income from export sales ($120,000 * 50%) 720,000 720,000 252,000 42,000 252,000 468,000 (I) S-Corp with IC-DISC Domestic Export Total 6,000,000 2,000,000 8,000,000 600,000 120,000 80,000 720,000 80,000 Dividend 80,000 600,000 40,000 640,000 210,000 210,000 80,000 60,000 14,000 14,000 224,000 224,000 484,000 (II) 16,000 12,000 12,000

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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 An Independent Member of Baker Tilly International

IC-DISC Owned Directly by Flow Through Entity

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

Individual A

Ownership Directly by Individuals

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

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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) An Independent Member of Baker Tilly International

Computation of Interest Charge

2009 2010 Prior Year Current Year

$ 150,000 DISC Taxable income and earnings and profits for the year Actual distributions during current tax year $ (60,000) Accumulated DISC income - end of year

Calculation of interest charge:

Accumulated DISC income prior year

Calculation of Excess Current year distributions

Current year income Current year distributions Excess Current year distributions (negative) Current year deferred DISC taxable income Assumed deferred tax liability @ 35% Interest charge using current year Base Period T-Bill Rate 2010 "INTEREST CHARGE" paid by shareholder on individual return (deductible interest) $ 120,000 $ 210,000 $ 120,000 $ 150,000 $ (60,000) $ $ 120,000 $ 42,000 0.0034 $ 143 An Independent Member of Baker Tilly International 11 11

General Federal Tax

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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 An Independent Member of Baker Tilly International

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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 2 nd year wages, up to $10k per employee.

Differential Wage Payment for Employers – Eligible small business employers that pay differential and wages (payments to employees for periods that they are called to active duty, uniformed services, more than 30 days) 14 An Independent Member of Baker Tilly International

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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 An Independent Member of Baker Tilly International

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Questions?

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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.

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Thank You!

Kevin Heyde, CPA [email protected]

888.587.1719

www.mcmcpa.com

An Independent Member of Baker Tilly International