Last week we took a moment to define a “DISC” by reviewing the basic requirements for a US corporation. See IC-DISC Basics: Requirements of an IC-DISC if you missed the posting. Today we are going to take a deeper look at some of the definitions related to the basic requirements. Specifically, we will review the definitions of
Gross Receipts Test Gross Assets Test Capitalization Requirements
IC-DISC Gross Receipts Test
I can appreciate attorneys and those that feel as though writing in complex sentences will make the reader more appreciative of their efforts. Such is the way of tax law and its never-ending reference to somewhere else deep in the tax code using a new definition you’ve never heard of before. Enter the IC-DISCISC and all its references and definitions. The DISC gross receipts test requires that during the taxable year, 95 percent or more of its gross receipts must be from qualified export receipts (which are of course defined elsewhere and include no less than eight separate types of receipts that qualify). It is important to note that the gross receipts are determined in accordance with the method of accounting adopted by the corporation.
What is a qualified export receipt?
Under IRC Regulation Section 1.993-1, qualified export receipts include: sale of export property, leases of export property, related and subsidiary services, gains from the sale of certain qualified export assets, dividends, interest on obligations which are qualified export assets, engineering and architectural services, and managerial services. As you can imagine, each of these types of receipts has their definition and constraints. We will plan to focus on several of these in a later post.
IC-DISC Gross Assets Test
Can you say 95 percent again? Yep, similar to the gross receipts test, in general, 95 percent or more of the adjusted basis of all assets in the DISC must be qualified export assets (which, to no surprise, have nine different types of assets).
What is a qualified export asset?
Under IRC Section 993(b), a qualified export asset is defined export property, assets used in connection with … export property, accounts receivable from export sales, money, obligations arising in connection with producers loans, stock of a related foreign export corporation, obligations issued or guaranteed by the Export-Import Bank of the United States, obligations issued by a domestic corporation for financing sales of export property, and other amounts on deposit in the US utilized to acquire other qualified export assets.
IC-DISC Capitalization Requirements
Perhaps we can keep this section a bit easier than the above two sections. A DISC may have only one class of stock during the taxable year with a par value of no less than $2,500. In the first year of the election to be treated as a DISC, the corporation must achieve the par value by the last day of the period within which the election is made and for the remainder of the tax year.
In our next article on IC-DISC Basics
Next week we will focus on defining qualified export property. Trust me when I tell you, this term alone could fill more than one blog post…..See you next week.
What say you, my friends?
Are you currently capturing all your qualified export receipts?
Are you truly optimizing your IC-DISC sales commissions through T by T analysis?
Other than exporting products, are there other tax incentives you may be eligible for?
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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.