An IC-DISC is used to recharacterize ordinary income generated from export sales, (which also happens to be taxed at the highest tax rate) into qualified dividends, which are then taxed at a lower rate. The process creates a number of benefits for businesses that have qualified export sales:
- A reduction in federal tax paid by the exporter
- An additional safeguard against duplicate taxation
- Reduction in the marginal tax rate
- Additional capital to increase exports or grow the business
One of the most complex and intriguing areas of the IC-DISC is the calculation of the commission expense paid to the IC-DISC by the related operating company. The process may seem simple at first glance, but to maximize the tax benefit to its full potential requires the application of several rules, making it a much more difficult calculation.
Here are the simple methods used to calculate the sales commission, which utilizes the greater total of two calculations
- 4% of export gross receipts
- 50% of combined taxable income from export sales
While this seems simple at first, and can serve as a valuable benchmark to estimate the low end of a possible benefit, it may not produce the largest available benefit calculation for the taxpayer.
"So, how do I calculate the commission to get the largest benefit possible?"
The regulations and codes regarding IC-DISC provide taxpayers the ability to allocate costs and expenses with export and domestic transactions. Also, individual sales transactions can be grouped in different ways to increase the potential profit margin. When the allocation of costs is determined to be either ratable or directly connected to products or transactions, the taxpayer may be able to increase the profit available per group or single transaction. As a result, this increases the sales commission paid out to the IC DISC.
It is possible for taxpayers to make annual determinations and group transactions by a product-line or product as long as that grouping conforms to:
- Recognized industries or trade use
- A 2-digit group of SIC codes (or an inferior combination or classification.
Transaction grouping doesn’t limit a taxpayer to product-line grouping or transaction-by-transaction methods for other products.
Understanding Overall Profit Percentage (OPP)
Any profits generated under the calculation methods listed above are limited to the OPP of the operating business. If the taxpayer generates a loss during a tax year, they cannot generate a tax benefit for that year.
How Acena Can Help Maximize Your IC-DISC Benefit
Our role during an IC-DISC consultation is to find the right combination of calculations and groupings in order to maximize the potential benefit available. Looking at a variety of combinations can increase the potential benefit available by up to 45-50% over the basic process of calculating the 4% of the gross receipts or with the 50% CTI method.
Acena Consulting wants to be the consulting firm you choose to help your organization maximize the potential IC-DISC benefit. Contact us today to begin the process of maximizing this potential benefit for your business.