© 2010 piascik & associates, p.c.. tax strategies export incentive – ic-disc 10% of...


Tax StrategiesTax Strategies

• EXPORT INCENTIVE – IC-DISC • 10% of Qualifying Export Income Tax Free

• RESEARCH INCENTIVE – R&D Credit• Tax Credit Equal to 10% of Qualifying Labor Costs

• MANUFACTURING INCENTIVE – Producers’ Deduction• Tax Deduction Equal to 9% of Qualifying Production Income


Export Tax Incentive…Only One Remains


Introduction to the IC-DISC• IC-DISC must be a U.S. corporation with only a single class of

stock.

• IC-DISC stock must have minimum par value of $2,500 at all times.

• The U.S. corporation must elect to be an IC-DISC by filing special forms with the IRS within a certain timeframe.

• Must maintain separate books and records and a bank account.

• Must obtain an F.E.I.N and file an annual return.

• Two types of IC-DISCs – Commission (most common) and buy-sell.


Introduction to the IC-DISC• The IC-DISC is not subject to U.S. corporate income tax,

thus it does not pay tax on its income (usually in the form of a commission) that it receives from the related U.S. exporter/manufacturer who also claims a tax deductible commission expense.

• When the IC-DISC pays a dividend to its owners they will pay tax on that income at a 15% tax rate. The owners are in effect converting a portion of their business income from exports, which is taxed at a 35% tax rate to qualified dividend income taxed to an individual at a 15% tax rate.


Determining the IC-DISC BenefitSample Calculation

Qualified Export Receipts $5,000,000

Less: Cost of Goods Sold (3,000,000)

Gross Margin 2,000,000

Less: Selling, General and Adm. Expenses (1,000,000)

Net Export Profits 1,000,000

IC-DISC Commission (Greater of 50% of Export x.50

Profits or 4% of Export Receipts) 500,000

U.S. Tax Benefit (Difference between Exporter’s x.20

Tax Rate of 35% and 15% $100,000


Ideal Candidates• Closely held exporter

• U.S. produced goods (software may qualify) and or certain services

• Annual export sales of at least $1 Million; AND/OR

• Net taxable income derived from export sales of at least $200,000.


The R&D Tax Credit....Claim What You Deserve!


Federal R&D CreditFederal R&D Credit

• Qualifying Expenditures • Wages, Supplies, Contract Research (65%)

• How the Rules Changed in 2001 for the Better• Pre 2001 – New to the WORLD• Post 2001 – New to YOU

• Gets Even Better in 2010 – Small Bus. Jobs Act• Credit Can be Claimed for Current Year and Prior

Three years (Amended Returns)


Virginia’s New R&D CreditVirginia’s New R&D Credit

• Signed into Law on February 25, 2011 by Gov. McDonnell (HB 1447)

• Effective 2011-2015

• Refundable Tax Credit (Do not have to owe tax to obtain the cash!!)

• Virginia Qualified R&E expenditures (Performed in VA)

• Tax credit amounts to:• 15% of the first $167,000 in Virginia qualified R&D expenses, or

• 20% of the first $175,000 of Virginia qualified R&D expenses if the research was conducted in conjunction with a Virginia public college and university


Issues to ConsiderIssues to Consider

• Can you Utilize the R&D Credit Now, Later, or Never? (Your Tax Position Matters)

• Deferred Asset Could Be recognized on your Financial Statements and your Treasury Dept Could Become Your Best Friend

• Tier I Concern for the IRS

• All Amended Returns are Subject to IRS Audit

• Need for R&D Study by a Reputable Firm With Expertise, Proven Record, and Audit Defence Services

• Timing/Planning of Project with other Financial Projects.


Producers’ Deduction....Made in the USA!


Producers’ DeductionProducers’ Deduction

• American Jobs Creation Act of 2004 Enacted on October 22, 2004

• Created Domestic Producers’ Deduction

• Repealed/Phase-out of the ETI Regime

• Taxpayers may deduct a specified percentage of their qualified production activities income

• Below-the-line deduction for individuals

• Phased in starting with tax years beginning in 2005


““Qualified Production Activities Qualified Production Activities Income” DefinedIncome” Defined

“Qualified production activities income” includes a taxpayer’s domestic production gross receipts reduced by the following:

• Cost of goods sold allocable to such receipts

• Other deductions, expenses, and losses directly allocable to such receipts

• A ratable portion of other deductions, expenses, and losses not directly allocable to such receipts or another class of income


““Domestic Production Gross Domestic Production Gross Receipts” DefinedReceipts” Defined

• Domestic production gross receipts generally are gross receipts derived from any disposition of qualifying production property manufactured, produced, grown, or extracted in significant part within the U.S.

• Includes gross receipts derived from construction performed in U.S. and engineering and architectural services performed in U.S. for U.S. construction


““Qualifying Production Property”Qualifying Production Property” Defined Defined

Qualifying production property includes:

• Tangible personal property

• Computer software

• Sound recordings


Example of a “Basic” ComputationExample of a “Basic” ComputationProvides for a deduction equal to a percentage of the lesser of:

• A percentage of Qualified Production Activity Income (QPAI) or

• Taxable Income

Percentage deduction for taxable years beginning in:• 2005 – 2006 3%

• 2007 – 2009 6%

• 2010 and after 9%

Example• For a taxpayer with $1 million in taxable income and QPAI that derives all of

its revenue from qualified production activities performed within the U.S., that would otherwise have annual federal tax of $340,000, the benefit is as follows (assuming no limitation otherwise applies):


Example of a “Basic” Computation Example of a “Basic” Computation (continued)(continued)

Taxable Income

after

Years Potential Deduction Deduction Income Tax Savings

2005 -2006 $30,000 $970,000 $329,800 $10,200

(3% of $1 million)

2007 -2009 $60,000 $940,000 $319,600 $20,400 (6% of $1 million)

After 2009 $90,000 $910,000 $309,400 $30,600 (9% of $1 million)


Tax Strategies SummaryTax Strategies Summary

• EXPORT INCENTIVE – IC-DISC • 10% of Qualifying Export Income Tax Free

• RESEARCH INCENTIVE – R&D Credit• Tax Credit Equal to 10% of Qualifying Labor Costs

• MANUFACTURING INCENTIVE – Producers’ Deduction• Tax Deduction Equal to 9% of Qualifying Production Income

© 2010 piascik & associates, p.c.. tax strategies export incentive – ic-disc 10% of...

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