IC-DISC is used to convert traditional export income, (which also happens to be taxed at the highest rate) and turns it into qualified dividends, which is then taxed at a lower rate. The process creates a number of benefits for businesses:
- A reduction in tax base for the exporter
- An additional safeguard against duplicate taxation
- Tax rate decrease
- Additional capital to increase exports
One of the most intriguing areas of IC-DISC is the calculation of the benefit’s commission expense for the related operating company. The process may seem simple at first glance, but to maximize the tax benefit to it’s full potential it requires the application of several rules, making it a much more complex calculation.
Here’s the simple calculation of how to calculate the commission, which utilizes the greater total of two possible methods
- 4% of gross receipts
- 50% of combined taxable income
While this seems simple at first, and can serve as a valuable benchmark to estimate the low end of a possible benefit, it will 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, 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 then increases the possible profit available per group or transaction. As a result, this increases the commission paid out for the benefit.
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 the benefit for that year.
How Acena Can Help Maximize Your IC-DISC Benefit
A tax consultant’s 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 for your organization. Contact us today to begin the process of maximizing this potential benefit for your business.