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Tax Incentive Strategy for U.S. Exporters: Interest-Charge DISC Alabama International Trade Center Dec 11: Birmingham Business Alliance Dec 18: Mobile Area Chamber of Commerce Edward K. Dwyer, CPA & Alex McGowin , CPA. - PowerPoint PPT Presentation

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Tax Incentive Strategy for U.S. Exporters: Interest-Charge DISC Export to the Future Conference Sponsored by: La SBDC, JPMorgan Chase, SUSTA and LADEC UNO Lindy Boggs Conference Center December 14, 2010

1Tax Incentive Strategy for U.S. Exporters: Interest-Charge DISC Alabama International Trade Center Dec 11: Birmingham Business Alliance Dec 18: Mobile Area Chamber of CommerceEdward K. Dwyer, CPA & Alex McGowin, CPA

Mail: P. O. Box 3057 Daphne, AL 36526Office Address: Stonebrook Business Park23210 US Hwy 98- Ste A-2Fairhope, AL 36532

Phone: (251) 401-4010 E-mail: ekdwyintax@aol.comPhone: (251) 232-7115 E-mail: alexmcgowin@aol.com

1Todays SpeakersEdward K. DwyerIndependent CPA/Intl Tax Consultant (1990 to present)

Intl Tax Partner, KPMG- New Orleans (1984-1990)

Director of Taxes, Ocean Drilling & Exploration Co. (1973-1984)

Member: AICPA, Society of Louisiana CPAs

Licensed CPA: Louisiana & Alabama

B.S. Accounting, Louisiana State University-N.O.

M.S.- Taxation, University of New Orleans

Alex McGowinInternational Tax Associate, Edward K. Dwyer, CPA (August 2013 to present)

International Tax Associate, PwC Houston (August 2012-August 2013)

Licensed CPA: Alabama

B.S. Finance, University of Mississippi

M.S. Tax Accounting, University of Alabama

2 2 2Overview of PresentationBrief History & Recent EventsImpact of recent laws on IC-DISCs, i.e. ATRA-rate increases, APA-Medicare tax.Overview of the IC-DISCPotential benefits of the IC-DISC with an example.Federal & State TaxationIncludes Mississippi, Alabama, and Florida treatment of IC-DISC.IC-DISC RequirementsThis will include basic structuring of the IC-DISC and applicable qualifying tests, i.e. gross receipt and asset tests.Intercompany Pricing RulesThis includes the specific methods allowable for transfer pricing between an IC-DISC and its related supplierExport Promotion ExpensesFinal Points 33Tortured History of the DISCCongress enacted the domestic international sales corporation provision in 1971 in attempt to stimulate U.S. exports.GATT & WTO controversyForeign Sales Corporation provision (1984)Extraterritorial Income Exclusion (2000)

JGTRRA of 2003 reduced the maximum tax on qualified dividends

Extraterritorial Income Exclusion repealed in 2004

IC-DISC (around since 1984)

4 Impact of Recent LegislationAmerican Taxpayer Relief Act of 2012Benefit for 2012 and prior years was simply the 20% rate differential between qualified dividends (15%) and the top rate of 35% for individuals and corporations.New top income tax bracketNew legislation has added a 39.6% bracket for families making over $450,000 and a new preferred dividend rate of 20% for the same high income households.Healthcare and Reconciliation Act of 2010IRC Section 1411: 3.8% tax on unearned income for families with MAGI in excess of $250,000.0.9% additional Medicare tax on earned income for families with employment income in excess of $250,000.Impact on the current benefit of IC-DISC.The IC-DISC continues to be a great tax minimization tool. The typical rate differential is now approximately 16 percentage points assuming the highest applicable tax rates. (39.6% vs. 23.8%) 5

56INTEREST CHARGE-DOMESTIC INTL SALES CORPORATION (IC-DISC) Two Alternatives:

Allows tax deferral within IC-DISC (on a portion of profits from up to $10 Million of annual receipts) at T-Bill rate so long as profits are invested in expanding exports, or,

IC-DISC may distribute some or all of its earnings as qualified dividends, with its shareholder(s) that are individuals being subject to a maximum Federal tax of 20% (for families making over $450,000/ $400,000 for individuals)As previously discussed, an additional 3.8% Medicare Tax could also apply making the maximum tax on qualified dividends 23.8%. Source: IRC Sections 991-997 and related Treas. Regs.67IC-DISC: Benefit 1. Qualified Dividends Distributed: IC-DISC = [39.6% x 50% + 23.8% x 50%] of CTI = 7.9% reduction on overall effective rate(approx. 20% tax liability reduction):OR--Retain & Reinvest Export Profits:50% of profits taxed @ ordinary income rates, andTax deferred on 50% of profits with T Bill interest rate charged on tax deferred3. OR--May Do Some Of Both78EXAMPLE: $5 Million Export Sales w/ 10% Net-to-Gross Profit (2013)*** With No IC-DISC: Taxable: $500,000 Marginal tax rate: 39.6% Shareholder tax: $198,000w/ IC-DISC: 158,500IC-DISC Saves $39,500Effective Rate Reduction: 7.9% (39.6%-31.7%)Tax Savings (7.9/39.6): 20% With IC-DISC: Taxable: $500,000 IC-DISC: 50% of Profit $ 250,000All distributed 23.8% Shareholder tax: $ 59,500Supplier: 50% of Profit $ 250,000 S Corp. s/hs: 39.6% Shareholder tax: $99,000 Total tax: $158,500Effective Rate: 31.7%(158,500/500,000) *** Subject to top 23.8% dividend rate (includes Medicare Tax of 3.8%.)

89 Alternative: Retain & Reinvest IC-DISC Earnings in Export OperationsTax is deferred as long as reinvested and IC-DISC continues to qualify.

Shareholder(s) pay an interest charge on the total tax deferred. (Use Form 8404 to compute.)

Measured by T-Bill rate of the previous year. (For 2013: 0.14 %--See Rev. Rul. 2013-24, 2013-49 I.R.B.).

http://www.irs.gov/pub/irs-pdf/f8404.pdf

910IC-DISC STRUCTURE & SETUPClosely-held corporation or LLC with S corp. election in effect (or its individual shareholders)Form(s) (or has its S/Hs form) a domestic corporation under state corporate law. That C corp. and its shareholder(s) elect DISC status for it on a timely Form 4876-A.Written consent of all shareholders.http://www.irs.gov/pub/irs-pdf/f4876a.pdf

1011AlternativeIC-DISC Ownership Structures Parent-Subsidiary Brother-Sister

Partnership orS-Corp. orC Corp.IC-DISCPartnership orS-Corp. orC Corp.IC-DISCIndividual OwnersIndividual OwnersIC-DISC Federal TaxationThe IC-DISC does not pay any income tax on its taxable income from the export sales.It must file an annual information return on Form 1120-IC DISC. It takes profits and pays a dividend back to shareholder company or individual s/hs. If the shareholder is an S corporation or an LLC, the dividend is passed-through & taxed at the individual level at maximum current qualified dividend rate of 23.8 % (Includes 3.8% Medicare Tax)

1212State Taxation of IC-DISCAlabama AL taxes IC-DISCs as if they were ordinary C-Corporations.The applicable Alabama code and regulations regarding C-Corporations applies. (there is no specific language on IC-DISCs).MississippiMS also taxes IC-DISCs as if they were ordinary corporations (Miss Reg. 807).Therefore it is an eligible corporation for consolidated or combined return purposes where the entity is a member of an affiliated group.FloridaRespects the federal tax treatment of the IC-DISC. More clearly, it is not a taxable entity for Florida state tax purposes. 13IC-DISC REQUIREMENTSBe a domestic C corporation, Have only a single class of stock with a minimum par value of $2,500, Make a timely IC-DISC election,Within first 90 days following formation of a new IC-DISC.Meet the 95% qualifying assets test,Meet the 95% qualifying gross receipts test,Have a separate set of books, andHave its own bank account

141415

95% QUALIFIED EXPORT GROSS RECEIPTS TEST

Sales of certain qualified export property,Certain export related dividends and interest,Interest income on an obligation arising from producers loan(s) and, Certain export related managerial services income.

1516QUALIFYING GROSS RECEIPTS (CONTD)Income or Commissions from certain Related and Subsidiary Services and,

Engineering or Architectural Services in connection with construction projects located or planned for location outside the U.S.1695% QUALIFYING EXPORT ASSETS TEST (Applied @ Year End EOY)Accounts Receivable -export sales of DISC or its SupplierProducer Loans to related supplier-5 yr. maximum term Funds Awaiting InvestmentObligations of Ex-Im Bank and PEFCO Reasonable Working CapitalThese EOY amounts must total at least 95% of the IC-DISCs total assets at EOY.171718QUALIFYING EXPORT PROPERTYManufactured, produ

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