Are Your Company’s Products Used in Canada, or Anywhere Else Outside of the U.S.? Get Ready for a Lower Tax Bill!

Are Your Company’s Products Used in Canada, or Anywhere Else Outside of the U.S.? Get Ready for a Lower Tax Bill!

 

The following article is a reprint from an article written on behalf of the Manufacturing Money Newsletter published by Lakeview Consulting, Inc. To learn more about Lakeview Consulting, visit www.lakeviewconsulting.net

By Steve Ruda, Director of Client Relations, ICS Tax LLC
Manufacturers and processors are reaping large rewards for involvement with products used abroad – including in Canada and Mexico. Many, however, are still inadvertently passing on claiming the benefits that the federal government is offering. In the Tax Cuts and Jobs creation act of 2018, the federal government preserved the “IC-DISC” (Interest Charge Domestic International Sales Corporation) export incentive.  The IC-DISC leads to drastically lower federal tax rates for the owners of privately held companies that make and/or sell products that are at least partially manufactured in the United States.  The effective federal tax rate on much to all income from such products may drop from 37% to 23.8%.  Growers of agricultural products and food processors are eligible as well.  Services can also qualify in some circumstances. Companies often pass up on the IC-DISC because of misconceptions.WHO CAN BENEFIT?

In short, the following are the requirements to use this easy and inexpensive to implement incentive:

  • Company must be at least partially privately held for owners to benefit.
  • Some products or services must be at least temporarily used outside of the U.S. (product need not be exported or sold to a foreign company).
  • Those products must be at least partially made, processed, grown, or extracted in the U.S.

HOW DOES IT WORK, AND HOW MUCH EFFORT IS REQUIRED?

Mechanically, the IC-DISC is seamless to use, and does not affect business operations whatsoever.  By design, a company will generally create a tax-exempt IC-DISC entity as a wholly owned subsidiary.  This entity receives a tax-free commission for doing absolutely nothing (other than being an IC-DISC).  In turn, the IC-DISC pays a dividend back to the operating entity.  When the income flows back to the owner(s) of the operating company on their individual tax return(s), it is taxed at dividend rates, rather than ordinary rates.

Thus, the difference between the ordinary rate and the dividend rate is achieved on the commission amount.  The savings is the reward and incentive to owners of U.S. companies provided by the federal government to encourage production of U.S. made products being used outside of the U.S.  The time required to implement the IC-DISC is generally only a few hours when working with the right specialists.  On an ongoing basis, the annual effort is typically even less.

HOW IS THS INCENTIVE OVERLOOKED?

The IC-DISC is often overlooked for different reasons – some examples are outlined below:

  • Component makers that sell to U.S. companies, such as a Big 3 auto maker, and ship to a U.S. location (such as Laredo, Texas – a popular U.S. Customs clearing location for components headed to Mexico) may assume that because the customer is an American company and that the shipping destination is an American city, that the incentive would not apply.  In actuality, the IRS regulations include a taxpayer friendly provision that specifically makes such sales eligible.  Even if the products into which the components are incorporated return to the U.S., the sale of such components would specifically be eligible in most cases.
  • Distributors and brokers may assume that they are not eligible for benefits as they are not producing the product.  Manufacturers may have been incorrectly advised that they need to be the actual exporter.  Both the manufacturer and distributor of a product used abroad are generally eligible to use the IC-DISC.
  • Food growers and processors might believe that the IC-DISC is only for manufactures, but these activities qualify.

HOW CAN MY COMPANY INVESTIGATE FURTHER?

ICS can help determine if using the IC-DISC can help you save taxes with a free analysis.  In a very short consultation, we can usually determine if the IC-DISC will be worthwhile. To learn more about the IC-DISC Export Incentive and other specialized tax planning strategies, visit www.ics-tax.com.