With so many things in life, timing is critical to success.
In the case of an IC DISC, the value of setting up a new IC DISC depends upon when your company reaches a particular level of sales that will provide a tax benefit acceptable to the owner (gotta love the long winded way of saying ‘it depends on’).
Quick Review: What Is An IC DISC?
As we have discussed in prior posts, an IC DISC is a US company that elects IC DISC status and is set up as a subsidiary to an operating entity that delivers products or services outside the US.
The structure allows an operating company to pay sales commissions to the IC DISC and receive a current year tax deduction for the amount of the commission payment.
The commission expense is revenue to the IC DISC that is then distributed to the owners of the IC DISC as dividends at the qualified dividend rate (currently 15%). The benefit is a permanent tax saving of roughly 20% (tax rate at the operating entity level, assumed to be 35% less the 15% tax on the dividends paid).
Can I Include Past Export Sales In The IC DISC Commission Calculation?
With many tax incentives such as the R&D tax credit or enterprise zone credits, a taxpayer can file amended tax returns and generate tax benefits from prior years.
With a new IC DISC, a taxpayer cannot look back at transactions that occurred before the IC DISC entity was formed and generate tax benefits from export sales.
When Should I Set Up An IC DISC?
Are you currently delivering products or services outside the US?
Perhaps yesterday would be a good start.
If you have broadened your market to now export products or services outside the US or have started working with a customer that exports your products outside the US, it would be a good time to have an IC DISC Specialist look at your situation.
Remember, each shipment that leaves US shores before you set up your IC DISC cannot be counted in the tax benefits calculation.
Contact your CPA or tax advisor to start gathering information about your export sales and the opportunity to set up an IC DISC.
Your CPA or Enrolled Agent should be involved in any discussions with IC DISC specialists in order to make sure they understand the tax law behind the tax benefit.
We offer a free analysis and consultation to help you both understand the potential tax savings available to your company.
What say you friends?
Are you a distributor delivering products outside the United States and not utilizing a IC DISC?
Do you need more information on how to estimate your potential IC DISC benefit?
Are you optimizsing 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.