News from Paradigm Partners

Most Engineering/Architectural Firms are unaware they are excellent candidates for the IC-DISC tax incentive. Engineering and architectural services qualify for the incentive if the work is done on permanent structures/buildings outside of the United States.

Structures can include:

Roads
Bridges
Buildings
Factories
Any Permanent Structure (if it can be shipped, then it is not a permanent structure)

The firm must be U.S. based however the engineering and architectural work can be done in the U.S. or abroad by its employees.

What is IC-DISC?

IC-DISC is an acronym for Interest Charge - Domestic International Sales Corporation. It is the last remaining export incentive available to U.S. exporters. It has been around in its current form since 1984, but did not become popular until the end of 2006 when the EIE (Extraterritorial Income Exclusion) was phased out.

It is a domestic 'paper' entity that does not require employees, offices, or tangible assets. The actual entity is a C-corporation, typically incorporated in Delaware or Nevada, that elects to be treated as an IC-DISC and is governed under Internal Revenue Code §§991-997.

What are the benefits?

The IC-DISC provides permanent tax savings on a portion of a qualifying U.S. exporter's foreign sales. These savings can be as much as 10% of the exporter's foreign trade income and the savings can be immediately realized on the exporter's quarterly estimated tax payments. The tax incentive is completely transparent to the exporter's customers and does not affect the exporter's operations.

Which companies can take advantage of IC-DISC?

The different entity types that can use the IC-DISC include flow-through entities (S-Corps, partnerships, LLCs, etc.); and closely-held C-Corps. In addition, most exporters need at least $2 million in foreign sales before this is a viable tax strategy. It's important to note that you do not have to be the manufacturer of any products to take advantage of IC-DISC - you qualify if you export domestically produced products.

The industries that have taken advantage of IC-DISC include:

Manufacturers
Distributors
Software Companies
Engineering/Architectural firms working on buildings/structures in foreign locations

How does IC-DISC work?

As an example, let's use a fictional exporting entity called XYZ Company.

XYZ Company forms a tax-exempt IC-DISC;
XYZ Company pays a commission to the IC-DISC based upon the Internal Revenue Code and pertinent Treasury Regulations;
XYZ Company deducts the commissions from its ordinary income taxed at 35%;
The IC-DISC pays no tax on the commissions because it is tax-exempt;The IC-DISC distributes dividends to its shareholders which are taxed at the capital gains rate of 15%;
The resulting tax savings are 20% of the commissions.

Should you hire a consulting firm?

As with most highly specialized tax incentives, it is recommended that a company should use an outside consulting firm with expertise in IC-DISC for the following reasons:

To maximize IC-DISC benefits:
1. It is more efficient and minimizes disruption to your company
2. Using a firm's knowledge, they can analyze the available allocation methodologies to arrive at the optimal commission amount on a transaction by transaction basis
3. Your IC-DISC status is protected by ensuring no unqualified transactions are used in the commission calculations; unqualified transactions can cause significant taxes to be owed to the IRS
No need to hire anyone;
Some firms offer free audit defense.

Summary

The IC-DISC is the last remaining export incentive available to U.S. exporters. Flow through entities and closely-held C-Corps that have exports in excess of $1 million can use the IC-DISC. Permanent tax savings can be as much as 10% of an exporter's foreign trade income and the savings can be immediately realized on quarterly estimated tax payments. And finally, it is recommended that you seek an outside consulting firm to help you take advantage of the IC-DISC export tax incentive.