DISCovering Tax DISCounts

Wednesday, September 18th, 2019

By Mark Zietlow

One day, I decided to see if I could find any innovative tax strategies.  Believe me, this is not an easy task.  After all, there are over 526 tax forms, 70,000 pages, and 7 million words, in our federal tax code and regulations.  Even the EZiest form–the 1040EZ–has 33 pages of instructions.

So I started plodding through the pile of tax forms.  Suddenly, I came to Form 6478 – Credit for Alcohol Used as Fuel.  I couldn’t believe it!  Who pours their beer into their gas tank for fuel?  And who keeps track of it so they can fill in and file a tax form each year?

And then I came upon Form 1120-IC-DISC, Interest Charge Domestic International Sales Corporation Return.  Taxpayers can use an interest charge domestic international sales corporation (IC-DISC) to obtain a tax incentive available to manufacturers, producers, resellers, and exporters of goods that are produced in the United States with an ultimate destination outside the United States.

Image: under the Creative Commons Attribution-Share Alike 3.0 Unported licensexZise (Originally Haylli made valid by carol).

There are two tax advantages worth discovering about an IC-DISC.  First, an IC-DISC is not taxed on its income. Income taxes on profits from up to $10 million in export sales left in the IC-DISC are deferred.  Shareholders of an IC-DISC are taxed on its income only when the income is actually (or deemed) distributed.  So tax can be deferred until it is distributed to shareholders. However, there is a small interest charge tied to the Treasury bill (less than 1%), on the amount of deferred tax liability.

There is even a second possible advantage.  Income can be converted from ordinary income to qualified dividend income.  That is huge, because tax rates on qualified dividend income are significantly less than tax rates on ordinary income.   So when a decision is made to distribute income to shareholders, the income tax rate will be a lower qualified dividend income tax rate, instead of the normal ordinary income tax rate.

 

There are some qualification requirements, as you might expect.  To qualify as an IC-DISC, at least 95% of its gross receipts during the tax year must be qualified export receipts.  Qualified export receipts are gross receipts from selling export products. Additionally, at least 50% of the fair market value shall be attributable to articles from United States.

The IC-DISC is often an unDISCovered opportunity that can reduce income taxes for exporters. They are also inexpensive to establish and maintain.  Please contact our office if you are interested in learning more about this tax DISCount.

This post is made available to educational purposes only.  It provides general information and a general understanding of the law, but it does not provide specific legal advice. By using this site, commenting on posts, or sending inquiries through the site or contact email, you confirm that there is no attorney-client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.

Image: 401kcalculator.org  used under Public Domain License.

 

12274 James Street Holland, MI 49424 616-392-4100