California CPA For Interest-Charge Domestic International Sales Corporations (IC-DISCS)
The California CPAs at Cook CPA Group helps businesses learn about Interest-Charge Domestic International Sales Corporations (IC-DISC).
Interest-Charge Domestic International Sales Corporations (also known as IC-DISCs) have been used for more than 50 years to promote export activities in the United States. IC-DISCs can benefit from tax deferrals and reduce income taxation. However, some changes were made to the requirements surrounding IC-DISCs with the passage of the Tax Cuts and Jobs Act that impact the benefits that they can receive.
If your business is an IC-DISC or is interested in learning more about how to become an IC-DISC, get in touch with an experienced California CPA for Interest-Charge Domestic International Sales corporations. The CPAs that work with Cook CPA Group can assist businesses of all sizes with information about the requirements of being an IC-DISC.
Understanding Interest-Charge Domestic International Sales Corporations (IC-DISCS) in California
Structuring and operating as an Interest-Charge Domestic International Sales Corporation is a way for exporters to receive tax incentives on their export sales. The exports that qualify are mostly tangible goods, although films and professional services can be included in many cases. Exporters do not need to have manufactured the good in order to reap the benefit of IC-DISC.
Basics of IC-DISCs
IC-DISCs offer businesses that distribute U.S. products for export significant tax savings by transferring income from the exporter to the IC-DISC through a sales commission on the export. Essentially, it’s a way to incentivize exporters in the United States to increase their ability to compete globally through the reduction of tax liability. IC-DISCs are corporations that must elect themselves to be IC-DISCs. This election can be made by filing Form 4876-A.
Background of IC-DISCs
IC-DISCs have been in existence since 1971 when Congress enacted the Domestic International Sales Corporation (DISC) as a way to promote the export of goods that are domestically produced by businesses based in the United States. Through DISC, United States exporters could defer the taxes on the income they earned through their exports until the income was distributed to shareholders. DISC provisions were revised in 1984, which resulted in the IC-DISC program of today. The revisions included the introduction of an interest charge on profits generated through DISC but that were not distributed to shareholders.
The Tax Cuts and Jobs of 2017 made additional changes to IC-DISC. Firstly, certain tax rates were reduced. Secondly, a deduction for Foreign Derived Intangible Income was introduced. Thirdly, a deduction for qualified business income (also known as QBI) was introduced. While these changes can have an impact on exporters, the provisions of IC-DISC remain unchanged.
How to Qualify to Be An IC-DISC
There are certain requirements that corporations must meet in order to be an IC-DISC. They must have only one class of stock and they must maintain books and records that are separate from other business entities. Also, the corporation’s tax year must conform to the tax year of the principal shareholder that has the highest percentage of voting power among all of the shareholders.
The most important qualification for being an IC-DISC is the percentage of assets that are qualified export assets and the percentage of qualified export receipts. To be an IC-DISC, 95% of a corporation’s assets must be qualified export assets (also known as QEAs)—QEAs are exports that are commissions receivable, property, necessary working capital, and certain types of export-related assets. Also, 95% of a corporation’s gross receipts must be qualified export receipts (QERs); QERs are receipts from sales of export property, export property leases, and architectural and engineering services on construction projects that take place outside of the United States.
Benefits of Being an IC-DISC
The main way that IC-DISCs can reap tax benefits is by deferring income taxes on their income. They can defer up to $10 million in sales made from exports. (To reap this benefit, however, an exporting company must pay an interest charge.) Companies that elect to be IC-DISCs can also benefit by converting the ordinary income that they use to pay commissions into qualified dividend income, which is taxed at a lower rate. This can result in permanent tax savings. A California sales tax audit accountant could help your business navigate through this.
IC-DISCs can determine their taxable income by using the method of accounting that they usually use while keeping their books and records. Cash accounting, accrual accounting, or any other accounting method authorized by the IRS is acceptable for IC-DISCs. However, there are certain rules and exceptions. IC-DISCs must use the accrual method of accounting if their average annual gross receipts for the prior 3 years exceeds $25 million. Also, IC-DISCs that are not small businesses must use the accrual accounting method for purchases and sales of inventory items. If an IC-DISC would like to change the method of accounting that they use to report their taxable income, they must file Form 3115, Application for Change in Accounting Method.
How a CPA Can Help IC-DISCs
An experienced CPA can help exporters that have already elected to be an IC-DISC implement and optimize their structures and perform other functions that can allow them to maximize their tax savings. If your company is not currently an IC-DISC but is interested in electing to become one, a CPA can guide you through the decision and assist you with the election process.
Consult with a California CPA for IC-DISCS
To learn more about the implications of being an Interest-Charge Domestic International Sales Corporation, get in touch with a CPA from Cook CPA Group. With the help of experienced California tax accountants, you can learn more about the benefits associated with IC-DISCs and how they apply to you.