As we have looked at in other articles, the IC-DISC can be a significant tax savings for US companies that deliver products outside the US. A question came up during a discussion with a CPA firm that reminded me that there may be some misconceptions about companies that distribute goods outside the US.
Can a distributor delivering products outside the US have sales that qualify for IC-DISC treatment?
Yes is the most direct and simple answer but let’s look more closely at how they qualify.
Meeting the 50% FMV Test
Under IRC Section 993 (c) and Regulation Section 1.993-3, an export property is defined as property that is “Manufactured, produced, grown or extracted in the US by any person…” (IRC Reg Section 1.993-3(a)(1)) In addition, “Not more than 50 percent of the fair market value of which is attributable to articles imported into the United States…” (IRC Reg Section 1.993-3(a)(3). So, as long as the property being delivered offshore meets the definition of “export property” including the 50% of FMV test, the resulting sales should be able to qualify for IC-DISC treatment (please consult your tax advisor to make sure you meet all the requirements).
Controlled Groups and Distributions
Where a US company has a group of companies under common ownership and meets the definition of a Controlled Group (under the IC-DISC rules, a controlled group results where greater than 50% common ownership exists rather than 80% as found under IRC Section 1563), the transfer of export property from one entity to another does not trigger an export sale until the export property is delivered off-shore and to an unrelated party. Except….(you knew it was coming, right?), sales to a branch located off-shore (an example might be a related subsidiary located in the United Kingdom) may be qualified export sales triggering the tax benefits of the IC-DISC.
Territories versus neighbors
Remember that sales or delivery to a US territory, including Puerto Rico, US Virgin Islands, Guam, Marshall Islands, Palau and others are not qualified export sales for IC-DISC purposes. However, sales and delivery to Canada or Mexico do qualify.
What say you friends?
Are you a distributor delivering products outside the United States and not utilising an IC-DISC?
Do you need more information on how to estimate your potential IC-DISC benefit?
Are you optimising your current export sales through marginal costing?
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.