Last week we took an initial look at some of the issues related to choosing a tax consultant to set up and administer an IC-DISC for your company. Today, we will review the second and more important set of questions related to optimizing the annual tax benefit of your IC-DISC.
As we discussed last week in our blog titled, Choosing an IC-DISC Consultant, understanding the questions to ask and why they are important are critical to knowing if you are choosing a strong, technically-oriented IC-DISC specialist.
Today’s blog will highlight some of the issues and questions that are important to your decision-making process.
Let’s take a look.
Understanding Optimization versus generating benefit
Most tax consultants that work with incentives understand that an IC-DISC will generate tax savings for companies that deliver products outside the US. However, when questions about how to truly optimize a company’s annual tax savings start surfacing, the consultants that don’t understand (or have even read) the IC-DISC regulations fall quickly to the pavement.
Calculating the Benefit – Virtually all tax consultants that know about the IC-DISC can explain the difference between the 4% of revenue test and the 50% of net income test.
Some consultants can even explain the benefit of completing the optimization calculations based on individual transactions versus the full cost method.
However, understanding the myriad of ways transactions can be grouped, eliminated or profit maximized through proper analysis of expenses really falls to only a few experienced and highly specialized IC-DISC experts.
Unless the tax consultant has a strong international tax background and can help you understand how IRC Section 861 applies and should be used to your benefit, they may not be the best option.
HINT: There are 12 different methods that each transaction (or group of transactions) can be analyzed against to generate the highest per transaction profit. It might be advantageous to ask prospective consultants to describe them to you.
Knowing the questions and why they are important
I started this series of articles with the intent of helping companies understand how to assess tax consultants that consider themselves IC-DISC specialists. It is paramount that knowing the questions to ask and why they are important be part of your due diligence.
OK, so how do you gather that type of experience if the knowledge is so specialized?
My best advice is to review the information I have listed above and identify three to five tax consultants either through your own network or through your CPA (don’t just speak to one or two, there are too many that really don’t understand the details) and ask questions that will flush out the information I have outlined above.
If you struggle with understanding taxation and some of the concepts behind it, ask your CPA to be part of the phone interviews. They can help you understand if the consultants you are talking to are giving good information or simply trying to confuse you with tax jargon.
I have no doubt that if you own your own business; you will be able to separate the wheat from the chafe.
By the way, fees will vary dramatically as well the benefit derived so understanding the net benefit after fees should be one of the ways to measure each consultant.
What say you my friends?
Can your IC-DISC consultant explain why T by T analysis will generate a higher tax savings?
Does your IC-DISC consultant help you understand how an 861 analysis will help your tax savings and how it is applied?
How comfortable are you that your IC-DISC consultant understands optimization and international tax principles?
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Randy Eickhoff, CPA is President of Acena Consulting. With more than 20 years of tax and consulting experience, Randy focused on helping companies successfully document and secure tax incentives throughout the US. He has been a long-time speaker nationally as well as conducted numerous training sessions on R&D tax credits and other US tax incentives.