This article originally appeared September 10, 2020 in the 209 Business Journal.
Delicious shelled or un-shelled, the humble pistachio has become America’s highest-valued specialty crop exported to China. That is despite escalating tariffs on American goods in the country resulting from the U.S.-China trade war. And it is not just pistachios: There is a booming demand around the world for food exports. In California, for instance, 44 percent of the food the state produces is sold overseas across more than 60 foreign markets.
Exporters too, for their part, love foreign markets — and not just because they are a valuable source of new consumer bases. It is also because, if they structure their corporation correctly, food exporters can take advantage of a tax incentive that can save shareholders double-digit percentage points on their income taxes, among other benefits.
That tax incentive is the interest charge domestic international sales tax incentive, or IC-DISC. First introduced in 1984, the regime is currently the only U.S. export tax incentive for companies.
How Does an IC-DISC Work?
To take advantage of the tax benefits, an exporter must set up a separate corporation to serve as the IC-DISC. The operating company pays the IC-DISC a commission based on export sales and export taxable income, which is tax deductible to the exporter. Because the IC-DISC is tax exempt, it pays no taxes on the income received from the operating company.
The IC-DISC then pays that income out to its shareholders — who are identical with the shareholders of the operating company — in the form of dividends. This creates major tax benefits for shareholders because dividends are taxed a rate of 20% to 23.8%, rather than 37%, which is the top ordinary income tax bracket.
Alternatively, the IC-DISC can choose to retain its earnings, resulting in a tax deferral that can extend indefinitely. However, shareholders in this scenario do assume an interest charge on the deferred taxes.
There is no minimum export amount to qualify for the IC-DISC, please contact our BPM IC-DISC team to see if an IC-DISC will work for you.
Qualifying for IC-DISC
The IC-DISC exists solely on paper; it need not have any employees, offices or intangible assets. It does, however, have to maintain its own accounting records, and it must file a separate U.S. tax return.
And there are other details: For instance, the IC-DISC must be a C corporation, have only a single class of stock, and must have a minimum of $2,500 in capital.
But the important thing is it can pass these two tests: the 95% gross receipts test and the 95% qualified export asset test. The former test just means that 95% of the IC-DISC’s gross receipts must come from qualified gross receipts. Categories of gross receipts that qualify include sale, exchange or other disposition of export property; lease or rental of export property used outside the U.S.; and services related or subsidiary to the sale of exports.
Additionally, sales made to U.S. distributors or to foreign disregarded entities may qualify, assuming those entities ultimately export the product in some form. This can help, for example, almond or cotton farmers who sell to U.S.-based processors or distributors who ultimately export the product qualify. In any case, it is important to consult with an accountant familiar with IC-DISC rules and regulations to determine what sales qualify.
Receipts that definitely do not qualify include export property ultimately intended for use in the U.S., sales and leases subsidized by the U.S. government, and export property intended for use by the U.S. government.
What Kind of Exports are Eligible?
Only certain kinds of goods qualify as export property under IC-DISC regulations. Intangible assets like patents, copyrights, designs, franchises and other similar property categories do not qualify. Oil, gas, coal and uranium are also excluded, as well as unprocessed softwood timber and property leased or rented by any other business connected to the corporation that owns the IC-DISC.
Per U.S. Treasury regulations, export property must be manufactured, grown or extracted in the United States. It must also be used, consumed or otherwise disposed outside the U.S. And no more than 50% of the property’s fair market value should be attributable to any foreign content.
Thankfully, that does not greatly affect agriculture businesses. Top food exports including wine, cotton, beef, almonds, walnuts and pistachios can all be qualified export property, assuming they meet all the other requirements mentioned above.
Single and Shared IC-DISCs
Shared IC-DISCs, in which multiple tax payers pay commissions to the same IC-DISC entity, can make it easier for smaller exporters to take advantage of these tax incentives. For instance, some larger processors in the Central Valley have worked with BPM to set up shared IC-DISCs in which the processors serve as a kind of sponsor for their growers.
In this way, electing to share an IC-DISC can help companies subsidize some of the fees associated with setting up and maintaining the IC-DISC. Make sure to ask your IC-DISC accountant about this option, if costs are an obstacle to your business taking advantage of this important tax benefit. It may very well change the calculus.
Can IC-DISC Benefit Your Agribusiness?
You may have investigated the possibility of using an IC-DISC in the past and found it was not worth it. Or you may have made use of one previously, but found it more advantageous to not use them in years since.
However, the utility of IC-DISCs should ideally be evaluated on a yearly basis. Just because it was not worth it in the past, it does not mean it could not be valuable today. And just because you have used an IC-DISC before, you may not need to use one right now.
The professionals in BPM’s International Tax Services practice are equipped with the training and the deep industry knowledge you need to help you make the best tax decisions for your agribusiness.
From setting up IC-DISCs and calculating DISC commissions to ensuring the IC-DISC remains in good standing, BPM’s IC-DISC Export Tax Incentive team leverages advanced proprietary software and finely-honed expertise to efficiently take care of all your business’s IC-DISC needs with minimal input, so you can maintain focus on your business’s core activities.
Minnie Wright is an International Tax Partner at BPM LLP. She leads the firm’s IC-DISC (Interest Charge – Domestic International Sales Corporation) tax practice and co-leads its Agribusiness Industry Group. Minnie can be reached at [email protected].
BPM LLP is one of the 50 largest public accounting and advisory firms in the country. With more than 500 professionals along the West Coast – as well as an office in Bengaluru – we help clients succeed around the world. We offer a cross-functional team approach that gives clients direct access to the best and most qualified resources. To learn more, visit us at http://bpmcpa.com.