While the IC DISC has been around for a long time, small business owners and tax professionals still struggle with understanding how an IC DISC works and how to maximize its value. If you missed our initial blogs on the Basics of IC DISC and Must Know Keys to the IC DISC, you can find them by clicking on either link above.Today I thought we should look at the some of the concerns and myths surrounding this tax incentive that has been in place since 1971.
IC DISC Myth #1 - Only Direct Sales Qualify
Qualified sales made by a privately-held US company qualify when they are delivered outside the US. This is true regardless of whether or not the company that manufactured the products (or provided the services) transferred the products to a distributor who then sold them outside the US. As long as the products were delivered outside the US within one year of the original sales, the sale will qualify.
IC DISC Myth #2 – IC DISC is an off-shore Tax Strategy
An IC DISC is a privately-held US corporation that elects IC DISC status. This incentive has been in place since 1971 to provide an incentive to US companies to broaden their market by exporting products and services outside the US. It is not a tax strategy and does NOT involve either setting up an off-shore entity or moving assets off-shore.
IC DISC Myth #3 – An IC DISC only works for large companies
IC-DISCs work regardless of entity size. We have clients that ship less than $1 million in goods and services outside the US and generate a significant tax savings each year that helps them grow their business. For a small business that is in the process of taking the next step in terms of growth and market reach, the IC DISC can be a game changer and make them more competitive on the global stage.
IC DISC Myth #4 – An IC DISC is too much trouble to set up and administer
There are a number of requirements that need to be met in order to both qualify for and maintain IC DISC status (download our free IC DISC Basics slides for specifics!). We work with our clients to ensure that the meet the initial requirements during the initial set up and then continue to meet them once the entity is operational. These requirements are not arduous, they just need to be met and reviewed each year as part of the annual maintenance process.
IC DISC Myth #5 – IC-DISCs are tax shelters and subject to the FBAR reporting requirements
As noted above, an IC DISC is a US corporation that elects IC DISC status. It does not hold or maintain any foreign bank accounts or assets that are housed off-shore. Remember that an IC DISC is a tax incentive that Congress enacted in 1971 (you can find the complex regulations under Internal Revenue Code Sections 991-997) for US taxpayers and is not considered a tax shelter.
While the IC DISC has been a part of the tax code for more than 40 years, the benefits to US taxpayers have never been stronger. This tax incentive can generate substantial tax savings for companies delivering products and services outside the US and should be considered as part of your annual tax planning process.
Randy Eickhoff, CPA is President of Acena Consulting. With more than 20 years of tax and consulting experience, Randy focuses on helping companies successfully document and secure tax incentives throughout the US. He has been a long-time speaker nationally as well as conducts numerous training sessions on R&D tax credits and other US tax incentives.