Tax Incentives for Exported Products

Tax Incentives for Exported Products

Walnut Creek, Calif., (September 29, 2017) – Doug Wright is the partner‐in‐charge of International Tax Services with Burr Pilger Mayer, Inc., the largest California‐based CPA firm and CalCPA’s leading IC‐DISC services provider. Doug is a former PricewaterhouseCoopers international tax partner with over 30 years of IC‐DISC consulting and implementation experience. He is a nationally‐recognized authority on the use of “shared IC‐DISC” arrangements and maximization of IC‐DISC benefits through IRS‐ accepted strategies.

As a leading U.S. expert on the IC‐DISC export tax incentive, Doug was the invited speaker on IC‐DISC at the CalCPA Society’s 2011 annual state‐wide international business and tax conference. He has also been an invited speaker on IC‐DISC at various national conferences, and has authored numerous articles on IC‐DISC in national publications.

Doug currently has over 400 IC‐DISC clients throughout the U.S., including top‐five U.S. agriculture exporters in the grain, rice, cotton, and beef industries. He has a very large IC‐DISC client base in the California agriculture, farming and related processor communities. These IC‐DISC clients include an extensive number of California’s almond growers and processors, many of whom have benefited from Doug’s expertise in maximizing their IC‐DISC benefits for many years.

BPM respects and maintains the proprietary and confidential business information of its separate IC‐DISC clients. BPM also provides direct IC‐DISC support to other CPA firms throughout California and the U.S., fully respecting the existing client relationships other CPA firms have with the IC‐DISC clients they refer to BPM.

Doug can be contacted by e‐mail at dwright@bpmcpa.com or by phone at (925) 296‐1044.

A frequently overlooked U.S. tax provision known as the “IC‐DISC” can offer substantial permanent U.S. tax savings for U.S. growers, farmers and processors whose products
are ultimately exported from the U.S. The IC‐DISC tax savings are achieved from a
reduced 23.8% rate (U.S. qualified dividend plus NIIT rate) on at least half of the income 
derived from qualifying products, in lieu of the normal Federal tax rate which can be almost 40%.

Example of IC‐DISC Tax Savings

The following simple example illustrates the potential tax savings from use of an IC‐DISC. Without IC‐DISC

 Taxable income from sales of qualifying products: $ 1,000,000
 Federal tax burden without IC‐DISC (39.6% rate): $ 396,000

 

With IC‐DISC

Taxable income from sales of qualifying products: $1,000,000
Portion eligible for IC‐DISC benefits (at least 50%): $500,000
Federal tax burden on qualifying IC‐DISC portion (23.8%rate): $119,000
Portion not eligible for IC‐DISC benefits: $500,000
Federal tax burden on portion not eligible (39.6% rate): $198,000
Total Federal tax burden with IC‐DISC: $317,000
Total IC‐DISC tax savings: $79,000

In this example, $79,000 is the minimum annual IC-DISC tax savings.
the IC‐DISC tax savings on 70% or more of the income from qualifying products.

Background on IC-DISC

The IC‐DISC stands for “Interest Charge – Domestic International Sales Corporation,” a tax incentive which was introduced by Congress in its current form in 1984. It was designed to provide a U.S. tax incentive to stimulate U.S. export activities. The IC‐DISC is relatively unknown and often overlooked because other alternative tax incentives were more often used until the last remaining alternative was eliminated in 2006.

Basic Structure of an IC‐DISC

To utilize the IC‐DISC tax incentive, a separate IC‐DISC corporation must be established. IC‐DISC benefits cannot begin to accrue until this happens. This means that no IC‐DISC tax savings can be derived on product sales made prior to the establishment of the separate IC‐DISC entity. Establishing an IC‐DISC is a relatively inexpensive requirement, however, and can be accomplished very quickly by a qualified professional services firm.

As designed by Congress, the IC‐DISC corporation is merely a “paper” entity without any actual operations, employees, office space or assets. It remains virtually invisible to employees and customers. It serves solely as a Congressionally‐mandated vehicle needed to qualify for the IC‐ DISC tax benefits. It is required to have separate books and records, and it is through the related booking entries that IC‐DISC benefits are tracked and determined.

The “Shared IC‐DISC” Alternative

Participation in a “shared IC‐DISC” is a convenient, less costly and equally effective manner in which to obtain IC‐DISC benefits. A shared IC‐DISC is simply an IC‐DISC that has been established for shared use by two or more participants who can be related or entirely unrelated. Each participant in a shared IC‐DISC derives the same tax benefits they would have derived from their own separate IC‐DISC. The costs of implementation and annual maintenance are simply less on a shared basis. No information is shared between the participants in a shared IC‐DISC.

Increased Cash Flow and Liquidity

It is critical to understand that income is shifted to an IC‐DISC merely through bookkeeping entries. No cash is moved to the IC‐DISC or into a separate bank account. In fact, the operating cash flow of the grower, farmer or processor will actually increase from use of the IC‐DISC, due to the substantial reduction in U.S. tax that would otherwise be incurred on such income.

Ownership and Operation of the IC‐DISC

Any form of operating entity can participate in an IC‐DISC, including a sole proprietorship, TIC, general partnership, limited partnership, LLC, S Corp or C Corp. The specific IC‐DISC ownership structure varies based upon each company’s specific circumstances, and whether it is participating in its own or a shared IC‐DISC. Similarly, the operation of an IC‐DISC and the determination of resulting tax savings varies based upon specific company circumstances.

Choosing an IC‐DISC Advisory and Services Firm

A fully‐qualified professional services firm (such as Burr Pilger Mayer) with relevant experience should handle all of the actions needed to set‐up the IC‐DISC and then maintain the separate accounting books for the IC‐DISC to ensure that all technical requirements are met. Failure to properly establish or maintain the IC‐DISC could result in “disqualification” of the IC‐DISC and/or loss of IC‐DISC tax savings. Equally important, a qualified firm can significantly increase and maximize IC‐DISC tax savings in accordance with established IRS rules.
In recent months, less experienced and even under‐qualified firms and advisors have attempted to perform the IC‐DISC advisory and implementation roles. In some such cases, potential users of IC‐DISC have been misinformed or not fully informed, leading to situations where potential IC‐DISC benefits may be overlooked or promised IC‐DISC benefits may be lost in their entirety under future IRS audit scrutiny.

In selecting an IC‐DISC advisory and implementation firm, you should carefully consider the following:

  • How many years of IC‐DISC and export tax incentives experience does an advisor have?
  • How large is an advisor’s existing IC‐DISC client base?
  • Does an advisor provide full turn‐key IC‐DISC services, from start‐up thru tax return?
  • How large is an advisor’s IC‐DISC team, and are its members fully‐dedicated to IC‐DISC?
  • Does an advisor stand fully behind its IC‐DISC services, including signing IC‐DISC tax returns as “paid preparer” and assuming IRS responsibility for their IC‐DISC results.
  • Can an advisor provide relevant references to other long‐standing IC‐DISC clients?
  • Can an advisor provide relevant references to other CPA firms that have referred their clients for IC‐DISC services?
  • Conclusion 
S. growers, farmers and processors whose products are ultimately exported from the U.S. can derive substantial U.S. tax savings from the IC‐DISC. It is not necessary for a grower, farmer or processor to be the actual exporter, or even to be selling to the exporter, in order to qualify for IC‐DISC tax savings. It is simply necessary to determine what portion of products is ultimately exported, and for a qualified firm to confirm that the product sales otherwise meet all IC‐DISC requirements.
  • 
IC‐DISC tax savings are truly a great opportunity for those who are properly‐ But time is of the essence in establishing the IC‐DISC company, since IC‐DISC tax savings cannot be claimed on income earned from sales made before the IC‐DISC is established (or participation in an established “shared IC‐DISC” is confirmed).
  • The experts at Burr Pilger Mayer, Inc. can quickly confirm the viability of the IC‐DISC in your specific circumstances and establish appropriate IC‐DISC arrangements. With many years of IC‐DISC experience, our international tax team can help you take advantage of this powerful tax incentive. We frequently work collaboratively with clients otherwise serviced by other CPAs and advisors, so welcome questions from your CPAs or other advisors.

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