Businesses in certain industries frequently overlook the Interest-Charge Domestic International Sales Corporation (IC-DISC) provisions of the tax code, which encourage U.S. manufacturing and exporting. The incentive essentially reduces the top federal tax rate on income from certain qualified goods and services from 39.6 percent to 20 percent.
“Because it is thought of as only a manufacturer’s incentive, many companies in certain eligible industries have never heard of the IC-DISC, or have summarily dismissed the incentive,” says Amit Mathur, CPA, director at WTP Advisors.
Rob MacKinlay, president of Cohen & Company, says, “Distributors, as well as industries that produce certain products and services, repeatedly overlook the IC-DISC. We have helped many of these companies realize that they are indeed eligible for the significant and easy-to-implement savings from this federal incentive that does not disrupt business operations whatsoever.”
Smart Business spoke with Mathur and some of the top accounting firms in the region about the IC-DISC and some of the industries that frequently miss, or underutilize, the valuable incentive.
Can distributors, brokers use an IC-DISC?
Distributors of U.S.-made products are eligible for IC-DISC benefits on those goods that are exported. Since many distributors have been told that they do not qualify for the ‘Domestic Production Activities’ deduction, which does indeed require manufacture by the taxpayer claiming the deduction, they have assumed that they aren’t eligible to use an IC-DISC.
“While the exported goods must be finished in the U.S., both the final manufacturer as well as the distributor that does the actual exporting are eligible to use the IC-DISC. Unfortunately, both parties often miss out on the opportunity,” says Jim Bowen, tax partner at Bober Markey Fedorovich.
Are architects and engineers entitled to claim savings under this provision?
Architectural and engineering services furnished in connection with foreign construction projects and facility expansions can qualify for IC-DISC benefits.
“Regardless where the architectural and engineering services are performed, and even if the project never comes to fruition, such services are eligible,” says Pete Chudyk, senior tax shareholder at Maloney + Novotny.
Can software firms save with the IC-DISC?
Licenses and sales of software programs used abroad, as well as in Canada and Mexico, may be eligible for IC-DISC benefits.
Mike Luxeder, tax director at Libman Goldstine Kopperman & Wolf says, “Software companies should examine where their products are ultimately used. The IRS recently clarified its position that software sales, licenses and royalties can indeed qualify for the IC-DISC.”
How might recyclers use the IC-DISC?
Recycled products, as long as they undergo the requisite amount of U.S. manufacturing and are ultimately exported, can be eligible for the IC-DISC. The IC-DISC tax regulations consider any product to be manufactured in the U.S. if at least 20 percent of the costs to produce the product are related to U.S. labor and factory burden. This includes labor related to destroying, cleaning and treating scrap or waste materials such as metals.
How can food producers and growers get the benefits of this tax provision?
Products that are ‘manufactured, produced, grown or extracted’ in the U.S., and are ultimately exported, are eligible for the IC-DISC. Ohio’s chief agricultural exports, such as soy and corn, are often missed. Raw, processed and semi-processed foods, livestock, pelts, etc., are also eligible.
Many farmers and ranchers, particularly those selling through certain cooperatives, are just now starting to realize the opportunity to participate in the tax savings from the IC-DISC.
If you’ve passed over the IC-DISC before because you’ve bought into the notion that this incentive is only for manufacturers and exporters, you may be losing money. There are many industries that can draw a benefit. However, it’s advisable that you contact a specialist to help your business navigate the complex rules. ●
Insights Tax Incentives is brought to you by WTP Advisors