Congress Extends IC-DISC Export Subsidy: More Profits From US Made Exports.
The two-year tax reduction bill enacted in December, PL 111-312, extended the 15% tax rate on qualified dividends. This also expanded the benefits of IC-DISC (or DISC). Using a DISC, exporters of US-made goods get a subsidy of at least 10% of their earnings on those exports. If your business sells $ 1 million or more of US-made products for use outside the US, you need a DISC. You can make a profit regardless of whether your company manufactures or simply distributes the products. The benefit applies to partnerships, corporations, and even sole proprietorships.
This is good news for all exporters, who can continue to receive an export subsidy. The 15% dividend tax rate and the regular tax deduction (often at a 35% tax rate) from DISC commissions combine to reduce federal income taxes. This export subsidy represents at least 10% of export profits. The grant also applies to architectural and engineering services for construction projects outside of the United States, but not to most other services. To get this export subsidy, you must have a separate paper company that chooses DISC status. It must be in place before goods are sold or construction services are billed.
DISC is NOT cutting edge, aggressive or risky. It has been around since 1971, but had limited use from 1984 to 2003, when the tax rate on dividends changed. Congress stated during the Bush administration that they wanted to keep DISC and the benefits for middle market exporters.
Several things are required for your business to get this grant. There must be a separate US corporation that has filed an IRS election to be treated as a DISC. It is purely a paper corporation with a capital of $ 2,500 and no other substance. This corporation must have agreements with commercial operating entities to obtain a commission. Commission is calculated under complex IRS rules based on export sales or the net proceeds from those sales. The business gets a federal income tax deduction for this commission. The DISC does not pay taxes on your income. The DISC can defer some winnings, but must distribute the rest. Final shareholders pay taxes at the rate of 15% instead of the regular federal income tax rates on the distributed commission. This results in a federal tax rate differential of up to 20%.
Simple Example: Smitty’s Plumbing Supply sells $ 3 million worth of Ohio-made pipe fittings to customers in Windsor, Ontario. Smitty’s net profit margin is 8% overall, so he made $ 240,000 on sales to Ontario. Smitty, the owner, is in the 35% tax bracket. Without a DISC, Smitty would pay $ 84,000 of federal income tax on export earnings. If Smitty had a DISC, he could reduce that tax by at least $ 24,000.
Commission calculation in its simplest form can be done with a Post-It ™ note, but the result is likely not optimal. Various techniques can increase profit. These include the application of the “no loss” rule, the percentage of total profit or the “marginal costing”. These techniques add to the complexity and cost of performing the calculation, but for sufficient sales volumes it can be well worth it. Optimizing these calculations in a way that the IRS approves requires experience. For very large transaction volumes, specialized software may be required. For many midsize businesses, these additional costs are trivial compared to the additional tax savings from DISC optimization. Consider each year whether the optimization calculations are worth it.
If you are an exporter of US made products, DISC can probably help you, but you need help setting up a DISC and calculating the best profit. A new corporation is needed as the DISC election must be made at the beginning of the DISC fiscal year. Additionally, the DISC and the business entity must have the appropriate agreements in place, and the DISC must have a “permanent” dividend resolution. Missing a key piece can kill your profit.
Remember, DISC savings start only when the new DISC is in place. Act now to start getting these tax benefits by calling Steve Fox.