HANCOCK BANK PRESENTS:THE IC-DISC

Max Koss, CPAInternational Tax Director - Warren Averett, LLC

Michael Beringer, CPATax Member - Warren Averett, LLC

February 4, 2016

1. General concept

2. A brief history

3. Structuring

4. IRS requirements

5. Calculation of commission

6. FAQs

The IC-DISC

TOPICS FOR DISCUSSION

• Tax deduction for exporter at effective rate • Max » 40% excluding state tax

• Dividend income to DISC owner @ 20% (+3.8% NIIT)

• Tax savings of approximately 16 percentage points

• This is not a tax shelter, not a “grey” area, it is an export tax incentive put into the tax code by Congress

The IC-DISC

GENERAL CONCEPT

• Original DISC concept was enacted in early 70s

• Congress intended to create a tax regime to promote exports and help U.S. companies compete in the global market

• An interest charge was added to appease trade partners

- and -

• After various successful legal challenges to the rules as illegal export subsidies, repeals of laws, enactments of replacement legislation, etc. DISC and IC-DISC (1971‐1984), FSC (1984‐1999), ETI Exclusion (2000‐2006)

• The IC-DISC is back, mostly due to the difference in the tax rates on ordinary income and dividends and capital gains.

The IC-DISC

BRIEF HISTORY

The IC-DISC

DISC STRUCTURES

U.S. Exporter(Corp, LLC or Pshp)

DISC U.S. Exporter(Corp, LLC or Pshp)

DISC

IRA

The IC-DISC

DISC STRUCTURES

U.S. Exporter(S corp, LLC or Pshp)

DISC

The IC-DISC

DISC STRUCTURES: ADD-ON TAX DEFERRAL

U.S. Exporter(S corp, LLC or Pshp)

DISC

Commission paid and deducted

Loan to Parent (interest charged by IRS) on Tax normally due – Exporter pays interest on loan

• Must be a U.S. corporation

• Must make an election to be an IC-DISC

• Must have minimum capital of $2,500

• Must have single class of voting stock

• Separate bank account – not required, but suggested

• 95% qualified export asset test

• Interest charge on deferred income (if any)

• 95% qualified gross receipts test

The IC-DISC

DISC REQUIREMENTS

Greater of:• 50% of profits; or• 4% of gross receipts

on exports of products which are manufactured, grown, or extracted in the U.S. by a person other than a DISC:

1. Held primarily for sale, lease, or rental for direct use, consumption, or disposition outside the U.S.; and

2. Up to 50% of the FMV of the export property can be attributed to foreign content.

The IC-DISC

COMMISSION CALCULATION

The IC-DISC

COMMISSION (1)

Total ExportsSales Revenue 10,000,000 (1) 1,500,000COGS (6,000,000) (2) (900,000)Gross Margin 4,000,000 600,000Operating Expenses (1,500,000) (3) (225,000)Exps Definitely Related to Exports (25,000) (25,000)Exps Definitely NOT Related to Exports (275,000) 0Total Expenses (1,800,000) (250,000)Taxable Income 2,200,000 350,000

(1) Actual Export Sales

(2) Actual COGS or allocation based on relative revenue

(3) Apportioned to export sales based on relative gross margin

The IC-DISC

COMMISSION (2)

Commission:4% of Gross Export Receipts 1,500,000 x 4% = $60,000

50% of Export Profits 350,000 x 50% = $175,000

Tax @ 40%Taxable Income Before DISC $2,200,000 $880,000Taxable Income net of DISC Commission

2,025,000 (810,000)23.8% Tax on DISC Dividend (41,650)Savings (16.2% x

$175,000)$28,350

• “Exported” goods (directly or indirectly exported), including Canada and Mexico

• U.S. content (no more than 50% of sales price can be foreign content)

• U.S. manufactured goods (20% of COGS U.S. labor/burden safe harbor)

• Products must not be further manufactured within the U.S. by another party (further manufacture outside the U.S generally qualifies) after the sale

• Certain services and leases (Related, Subsidiary, Architectural and Engineering)

• All manufacturing, growing, distribution, extraction, and architectural/ engineering firms should be thoroughly examined, even if they do not think of themselves as manufacturers or exporters.

The IC-DISC

PRODUCTS OR SERVICES THAT QUALIFY

• “Ultimate Use” Sales

• Sales to Related Party (and by related party in some cases)

• Simplified Calculations

• Distributor Sales

• Certain Services

• Software Companies

• Distributors/Brokers

• Food Growers

• Food Processors

• Equipment Leasing

• Recyclers

• Architectural/Engineering

• Timber (unprocessed softwood does not qualify)

The IC-DISC

OVERLOOKED TRANSACTIONS & INDUSTRIES

• $10 Million maximum export sales

• Minimum export revenue required

• Taxpayer must manufacture products

• Aggressive/tax shelter

• Business operations disrupted/administrative burden

• 4% of export sales or 50% of overall export profit is maximum commission

• IC‐DISC benefits for foreign owners endorsed by tax code

The IC-DISC

COMMON MISCONCEPTIONS

• What is the minimum amount of export sales needed for an IC-DISC?

• How can I figure out if I would benefit from this?

• Do I have to be the exporter of the goods?

• Do I have to be the manufacturer of the goods?

• What if I have a current operating loss or loss carryforwards?

The IC-DISC

FREQUENTLY ASKED QUESTIONS

QUESTIONS?COMMENTS?

Max Koss, CPAInternational Tax Director - Warren Averett, LLCmax.koss@warrenaverett.com

Michael Beringer, CPATax Member - Warren Averett, LLCmichael.beringer@warrenaverett.com