ICDISC

InterestCharge DomesticInternationalSalesCorporation

KevinHeyde,MountjoyChiltonMedley JamesSeiffert,Stites&Harbison
January19,2011

TodaysObjectives
ExplainthetaxbenefitsofanICDISCtoyour companyandshareholders RulestoqualifyforICDISCbenefits HowtoestablishanICDISC
forourdiscussiontodaywewillbediscussingICDISC thatisaCommissionDISCnotaBuy/SellDISC

ShouldaTaxpayerbeConsideringan ICDISC?
WouldmycompanyandshareholdersbenefitfromanICDISC? Doesyourcompanyexportproducts? Areproductsexportedproduced,grownorextractedfromU.S. source(neworused)majoritycontentofUSvalue(>50%value U.S.)? Doesyourcompanyprovideservicese.g.engineeringor architecturalservicesforconstructionprojectoutsideofU.S.? IsyourcompanyapassthroughentitysuchasanSCorporation orPartnership?

LegalStructure
Domesticcorporationincorporatedunderthelawsof anystateorDistrictofColumbia
Oneclassofstock Parorstatedvalueofoutstandingstockisatleast$2,500 oneachdayofthetaxableyear CorporationhasmadeanelectiontobetreatedasanIC DISC,executedbyanauthorizedofficerofcorporationand ALL shareholdersowningstockonthefirstdayofICDISCs taxableyear
Newlyformedentity,filedwithin90daysofbeginningofthe corporationsfirsttaxableyear Existingentity,filedduringthe90daysprecedingthefirst dayofthecorporationstaxableyear

IneligibleEntities
Entitiesthatcannot electICDISCtreatment,notanall inclusivelisting:
Corporationexemptfrompayingtaxes Personalholdingcompany Associationsthatarenotcorporationsbutaretaxable asacorporation Regulatedinvestmentcompany SCorporation Aninsurancecompany

AdditionalRequirements
95%ofICDISCsreceiptsmustbeQualifiedExport Receipts 95%oftheadjustedbasisofitsassetsmustbeQualified ExportAssetsattheendofitstaxyear Havesametaxyearasprimaryshareholder Maintainitsownsetofbooksandrecords Cannotbeamemberofacontrolledgroupwitha ForeignSalesCorp(FSC) Exportsalespriortoincorporation,capitalizationand electiontobetreatedasanICDISCdonot qualifyforIC DISCbenefit

QualifiedExportReceipts&ExportProperty
QualifiedExportReceipts
Grossreceiptsfrom
Sale,exchangeexportproperty,ultimate destinationanduseoutsideoftheU.S. Leaseorrentalofexportpropertyusedoutsidethe U.S. Commissionsearnedonthesaleorrentalofexport property Serviceswhicharerelatedandsubsidiarytoqualified sales Engineeringorarchitecturalservicesforconstruction projectslocatedoutsidetheU.S.

QualifiedExportReceipts&ExportProperty
ExportPropertyisproperty:
Manufactured,produced,grown,orextractedinthe U.S.bypersonotherthanDISC Notmorethan50%offairmarketvalueofexport propertyisattributabletoimportedmaterialsintothe U.S.

QualifiedExportAssetsofICDISC
QualifiedExportAssetsthatICDISCcanhaveonits balancesheet
Accountsreceivable Producersloans Exportproperty(i.e.,inventory),buy/sellDISC Exportpropertyassets,buy/sellDISC Temporaryinvestmentsofworkingcapital

ICDISCOwnedDirectlybyFlowThroughEntity
Individuals
BusinessProfits& Dividendstaxedto Shareholders

100% ExportsSales

NonUS Related Customer

SCorporation
NonUS Customer
Dividend 100% Commission

ICDISC

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OwnershipDirectlybyIndividuals
Individual A Individual B Individual A Individual B

Profitsnetof Commissions

Dividends

Exporter Supplier USCo

Commission

ICDISC USCo

Sales

NonUS Customer

NonUS Related Customer

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ICDISCTaxSavings&Benefits
ICDISCisexemptfromfederalincometax Exporter(Supplier)deductscommissionpaidtoICDISC,i.e. reducingtaxableincomeflowingtoshareholderstaxedat 35%,taxsavingsre:deduction ICDISCpaysdividendtoitsshareholderswhichistaxedat federalcapitalgainstaxratemax.15% Netfederaltaxsavingstoshareholdersoncommission deductionvs.dividendincome(35%vs.15%)yields20% Annualdeferraloffederalincometaxonupto$10,000,000 qualifiedgrossreceipts Potentialforstateandlocaltaxsavings PotentialEstate&GiftPlanningopportunities

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ExampleofTaxSavings
S-Corporation with no IC-DISC Domestic Export Total Sales Taxable Income before Commission (1) Commission expense 50/50 method Net federal taxable Income after Commission Shareholder Level Federal Tax at 35% Federal Tax on IC-DISC Dividend 15% Tax to shareholder After Tax Cash available to shareholder 210,000 42,000 252,000 468,000 (I) Minimum Federal Tax Savings (II) less (I) Footnote: (1) greater of (A) or (B) (A) 4% of Qualified export receipts ($2,000,000 * 4%) (B) 50% of export taxable income from export sales ($120,000 * 50%) 80,000 60,000 210,000 14,000 224,000 484,000 (II) 16,000 210,000 42,000 252,000 210,000 14,000 224,000 12,000 12,000 600,000 120,000 720,000 600,000 6,000,000 600,000 2,000,000 120,000 8,000,000 720,000 S-Corp with IC-DISC Domestic Export Total 6,000,000 600,000 2,000,000 120,000 80,000 40,000 8,000,000 720,000 80,000 640,000 80,000 Dividend

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OperatingtheICDISC
ExportSalesmadebySuppliertoitscustomers,DISCisnotinvolved ICDISCistransparenttoCustomers ICDISCearnscommissiononqualifiedexportsales TentativecommissionpaidbySupplierwithin60daysofyearend. ICDISCdistributescommissionincomeearnedtoshareholdersvia aqualifieddividend
ICDISCshareholderspayfederaltaxatcapitalgainsratemaximum rate15%(currentlyfor2011and2012)

FinalcommissionpaymentbySuppliermadewithin90daysof determination,preparationoftaxreturn Taxreturnisfiledonorbefore15th dayofninthmonthfollowing yearend

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WhatistheInterestCharge
CommissiontoICDISCdefersShareholdertaxuntil commissiondistributedbytheICDISC,qualifieddividend ICDISCshareholder(owner)paysanInterestChargetothe IRSwhenDISCearningsareaccumulatedandnotdistributed
CalculatedonForm8804,filedseparatelywithIRS:
Duenolaterthanoriginalduedateofshareholderstaxreturn, individualsApril15th,corporationsMarch15th FederalincometaxatordinarytaxratesonAccumulatedICDISC incomenotdistributed,approximatelyequivalenttoretained earningsofICDISC InterestchargerateistheBasePeriodTBillratepublished annuallybyIRS,September30ofeachyear,(Rev.Rul.201028)set 2010BasePeriodTBillrateat.34percent(.0034)

Shareholder(s)avoidinterestchargeifICDISCdoesnot accumulatedincome

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ComputationofInterestCharge
2009 Prior Year DISC Taxable income and earnings and profits for the year Actual distributions during current tax year Accumulated DISC income - end of year Calculation of interest charge: Accumulated DISC income prior year Calculation of Excess Current year distributions Current year income Current year distributions Excess Current year distributions (negative) Current year deferred DISC taxable income Assumed deferred tax liability @ 35% Interest charge using current year Base Period T-Bill Rate 2010 "INTEREST CHARGE" paid by shareholder on individual return (deductible interest) $ $ $ 150,000 (60,000) $ $ $ 120,000 42,000 0.0034 143 120,000 $ 120,000 2010 Current Year $ $ $ 150,000 (60,000) 210,000

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ICDISCSetup
Formadomesticcorporationincorporatedinanystateor DistrictofColumbia,needtoconsiderstatetaxtreatmentof ICDISC
DraftandfileArticlesofIncorporation ApplyforFederalTaxIdentificationNumber DraftandadoptCorporateByLaws RegisteredAgent

DraftandexecuteDISCCommissionAgreement FilefederalelectionForm4876A Openbankaccount

Contributeminimumcapitalof$2,500

Othermattersrelatedtoestablishmentofbusiness,e.g.
Mailingaddress(POBox,phonenumber,etc.)

Setupinternalprocessestotrackqualifiedexportsales

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StatetreatmentofICDISC
(specificrulesofeachstateneedtobeanalyzedfurther)
State Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Ilinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri State Tax Treatment of entity that elects to be an IC-DISC nontaxable - follows federal nontaxable - follows federal taxable as ordinary corporation nontaxable - follows federal taxable included in waters edge return combined return taxable as ordinary corporation nontaxable - follows federal nontaxable - follows federal taxable as ordinary corporation nontaxable - follows federal nontaxable - follows federal nontaxable - follows federal taxable as ordinary corporation nontaxable - follows federal nontaxable - follows federal nontaxable - follows federal nontaxable - follows federal taxable as ordinary corporation taxable as ordinary corporation taxable as ordinary corporation nontaxable - follows federal taxable as ordinary corporation (special rules) taxable as ordinary corporation taxable as ordinary corporation taxable as ordinary corporation nontaxable - follows federal State Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota North Dakota Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming State Tax Treatment of entity that elects to be an IC-DISC nontaxable - follows federal nontaxable - follows federal No tax taxable as ordinary corporation taxable as ordinary corporation nontaxable - follows federal nontaxable - follows federal taxable as ordinary corporation nontaxable - follows federal nontaxable - follows federal nontaxable - follows federal taxable as ordinary corporation taxable as ordinary corporation taxable as ordinary corporation nontaxable - follows federal nontaxable - follows federal taxable as ordinary corporation taxable as ordinary corporation taxable as ordinary corporation nontaxable - follows federal taxable as ordinary corporation taxable as ordinary corporation nontaxable - follows federal taxable as ordinary corporation No tax

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OngoingCompliance
HoldBoardofDirectorsandShareholdermeetingin stateofincorporation(e.g.adoptcorporate resolutionstodeclaredividends) Recordcommissionsreceived Maintainbooksandrecords FileForm1120ICDISCwithIRS Fileappropriatestatetaxreturns EnsureICDISCrulesaresatisfied!
Theaboveisnotintendedtobeacomprehensivelisting

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Questions?

IRSCircular230Disclosure
Asaresultofperceivedabuses,theTreasuryhasrecentlypromulgated RegulationsforpracticebeforetheIRS.TheseCircular230regulationsrequire allaccountantstoprovideextensivedisclosurewhenprovidingcertainwritten taxcommunicationstoclients. Inordertocomplywithourobligationsunder theseRegulations,wewouldliketoinformyouthatanyadvicegiveninthis presentation,includinganyattachments,cannotbeusedtoavoidpenalties whichtheIRSmightimpose,becausewehavenotincludedallofthe informationrequiredbyCircular230,norhaveweperformedservicesthatrise tothislevelofassurance.