1. ©2012 CliftonLarsonAllen LLP
Tax Incentives for Exporters
John C. Berens, CPA
January 25, 2012
John Berens, CPA
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2. The Basic Formula
Gross Receipts (Income) $ 2,000,000
Less
Deductions Key to Savings (1,500,000) (reduce taxable income)
(e.g., Depreciation, COGS, Payroll, etc.)
Total Taxable 500,000
Income Tax Rate 35%
Tax Due 175,000
Tax Credits Key to Savings 150,000 ($ for $ savings)
Tax Check to IRS $ 25,000
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3. IC-DISC (Interest Charge - Domestic International
Sales Corporation)
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4. What is an IC-DISC?
• An “interest charge-domestic international sales
corporation”
• A U.S. corporation may elect for federal income tax
purposes to be treated as an IC-DISC by filing IRS
Form 4876-A (Election to be Treated as an Interest
Charge DISC)
• An IC-DISC is not subject to federal income tax
• An IC-DISC pays dividends to its shareholders
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5. Qualified Export Receipts & Export Property
• “Export Property” is property:
• Manufacture, produced, grown, or extracted in
the U.S. by a person other than the DISC
• Not more than 50% of the fair value of export
property is attributable to materials imported into
the U.S.
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6. IC-DISC Typical Structure
IC-DISC Typical Structure
• Company sells goods
B
• Pays a commission to the IC-DISC
and deducts the amount of the
commission
A • DISC can loan commission
money back to exporter, or
• DISC pays a dividend to
shareholders
• Currently 15% tax rate
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7. Commission Calculation
• The commission calculation is the greater of:
• 4% of qualified export receipts
• 50% of export taxable income from export sales
• The commission cannot create a loss for the
supplier
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8. IC-DISC Example
Without IC-DISC With IC-DISC
Combined Exporter IC-DISC Total
Foreign Trading Gross Receipts 10,000,000 Foreign Trading Gross Receipts 10,000,000
Cost of Goods Sold (6,000,000) Cost of Goods Sold (6,000,000)
Selling, General, and Admin (3,000,000) Selling, General, and Admin (3,000,000)
Export Net Income 1,000,000 Export Net Income 1,000,000 1,000,000
Tax Rate 35% IC-DISC (Greater of):
Tax Paid 350,000 1) 50% of Export Net Income 500,000
2) 4% of Export Gross Receipts 400,000
IC-DISC Commission 500,000
IC-DISC Deduction (500,000)
Taxable Income 500,000 500,000
Tax Rate 35% 15%
Tax Paid 175,000 75,000 250,000
IC-DISC Net Tax Savings: $350,000 - $250,000 = $100,000
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9. IC-DISC – Key Points with Dividend Payout
• Export sales filed as commission income via 1120 IC-
DISC
• Reclassifies export sales from ordinary income to
qualified dividend
– Reduces tax rate from 35% to 15%
– $10M Exports generate minimum of $80K tax savings,
sometimes much more
• Paper corporation only
– Customers need not know of existence
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10. IC-DISC – Key Points with Income Deferral
• Annual deferral of federal income tax on up to
$10,000,000 of qualified gross receipts
• Minimum Deferral:
• $10 million X 4% X 35%= $140,000 in tax
• IC-DISC shareholder pays an interest charge to the
IRS when DISC earnings are accumulated at the
“Base Period T-Bill Rate”. For 2011 the rate is 0.22%
or $308 on a deferral of $140,000 in taxes.
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