FAQ

Must an IC-DISC be formed on January 1 or can it be started anytime during the year?

 

An IC-DISC can be formed at any time during the year. However, the IC-DISC tax savings can begin only AFTER the date of incorporation. Thus, the benefit will be prospective only.

When does Form 4876-A need to be filed with the IRS?

 

The Form 4876-A generally needs to be filed within 90 days of the date of formation of the IC-DISC. If that 90-day deadline is not met, then the IC-DSIC is not able to be used for that tax year. However, if it is filed within 90 days of the first day of the subsequent tax year, it is effective for the first date of the subsequent tax year.  If the 90 day deadline is missed it is possible to obtain Section 9100 relief, however this is an expensive process.

Does cash or property actually have to be paid to the IC-DISC?

 

The IRS code is quite clear that cash or property must be paid from the Related Supplier (the Operating Company) to the IC-DISC.

If cash or property is paid, what are the deadlines?

 

A reasonable estimate of the IC-DISC commission payment must be made within 60 days following the last day of the IC-DISC’s tax year. At least 50% of the “finally determined” IC-DISC commission is a safe harbor amount. Any difference between the initial estimated payment and the final IC-DISC commission amount must be paid to the IC-DISC within 90 days of filing the 1120-IC-DISC tax return.

What are the 60-day and 90-day rules?

 

The 60-day rule refers to the requirement that a reasonable estimate of the IC-DISC commission as “finally determined” be paid to the IC-DISC within 60 days following the last day of the tax year.  Remember, at least 50% of the “finally determined” IC-DISC commission is a safe harbor amount.

The 90-day rule refers to the requirement that any remaining amount not paid under the 60-day rule be paid to the IC-DISC within 90 days of filing the 1120-IC-DISC tax return.Conversely, the 90-day rule also operates to require that if the related supplier had overpaid the IC-DISC under the 60-day rule, the overpayment must be paid back by the IC-DISC within this same 90-day window.

Should I hire a specialist to prepare the 1120-IC-DISC tax return or should the company CPA firm prepare it?

 

That depends on how important specialized expertise is to you. Although many CPA firms prepare 1120-IC-DISC tax returns, most of those firms prepare fewer than five 1120-IC-DISC returns annually. Thus, because of how few IC-DISC returns that a typical CPA firm prepares, it is difficult for the firm to develop a true expertise. Compare this to the hundreds of 1120 and 1120S corporate returns and thousands of 1040 individual returns that a typical CPA firm prepares. Because of the sheer volume of 1120, 1120S, and 1040 returns the firm prepares each year, they quickly develop expertise with these types of returns.

Additionally, because of how few 1120-IC-DISC returns that a typical CPA firm prepares, the firm does typically does not have the luxury of being able to afford to invest the time and resources to develop a dedicated IC-DISC practice. Because of this, they usually lack the capability to perform a comprehensive IC-DISC transaction-by-transaction calculation (see question 8 below on “TxT” calculations).

Does the firm that prepares the 1120-IC-DISC tax return also handle the management of the IC-DISC

 

The firm that prepares an 1120-IC-DISC return typically does NOT handle the management of the IC-DISC itself. Thus, this responsibility is typically left to the accounting department of the company. But because the 1120-IC-DISC has different requirements than 1120, 1120S, or 1065 returns, the accounting department is often unaware of the ongoing management responsibilities of the IC-DISC. A very small number of IC-DISC firms include the IC-DISC management responsibilities as part of their service of preparing the 1120-IC-DISC.

Is it a problem if the "management" of the IC-DISC "falls through the cracks"?

 

Yes, we find that most “unmanaged” IC-DISC’s are technically disqualified as an IC-DISC. Thus, if the disqualified IC-DISC was audited by the IRS, all IC-DISC commission calculations (and the corresponding tax savings) would be denied. The result of this would be overdue taxes that must be paid, along with penalties and interest.

What is the difference between a "Simple" IC-DISC calculation and a "TxT" IC-DISC calculation?

 

A “Simple” Commission Calculation (also known as a “Standard” Calculation) is when all of the export sales are grouped into a single group of transactions; then the commission is calculated as the greater of 1) 4% of qualified export receipts (limited by the export income) or 2) 50% of export income. The simple calculation is called that because the calculation is simple.

A “TxT” Calculation (also known as a “Transaction by Transaction” Calculation or an “Advanced” Calculation) is one in which a commission is calculated on EVERY line item of every invoice. Then, the sum of all of the line-item commission amounts is summarized to arrive at the total IC-DISC commission amount. In addition to being able to use the higher of the “4%” or “50%” method for each transaction, there are a total of 18 calculation methodologies that can be utilized for each transaction line item, and in addition, at certain times, certain groupings can provide additional commission amounts.

Why go to the extra time and effort of doing a "TxT" Calculation when the "Simple" Calculation is so much easier?

 

When performed by an IC-DISC expert who uses specialized IC-DISC software, the average TxT Calculation is 3 times greater than a Simple Calculation, resulting in tax savings 3 times greater than that from a Simple Calculation.

Can anyone perform a complete TxT calculation?

 

Although dozens of firms claim to have the ability to perform a TxT calculation, in our experience, other than the IC-DISC Alliance members, less than 5 firms in the entire country have the necessary skill, experience, and software to perform a “Complete” TxT calculation.

What is the due date of the 1120-IC-DISC tax return? Is there an extension option?

 

The 1120-IC-DISC tax return has only one due date: “The 15th day of the 9th month after its tax year ends.” For a company with a 12/31 year-end, that means that September 15th is the last day to file the 1120-IC-DISC tax return. There is no extension option.

How is the "50% U.S. content" calculated?

 

This can be confusing because some people consider this a “backwards’ calculation. Let’s say that U.S. Company A buys raw material from Foreign Company C and that the U.S. company turns that raw material into a finished product, which is sold to a foreign customer. Does the product have at least 50% U.S. content? Here is an example:

Assume that U.S. Company A sells its product for $100. So long as the Company paid NO MORE than $49.99 to Foreign Company C for the raw materials, this meets the 50% U.S.-content requirement.

What is an "Indirect Export"? How is it different than a "Direct Export"?

 

A direct export is when a U.S. company sells its product directly to a foreign customer. An indirect export is when a U.S. company sells its product to another U.S. company and that company sells the product directly to a foreign customer (without any further U.S. manufacturing by the U.S. based customer). For example:

  • U.S. Company A sells a product to Foreign Customer C (Direct Export).

  • U.S. Company A sells a product to U.S. Company B and U.S. Company B sells the same product to Foreign Customer C (Indirect Export for U.S. Company A and Direct Export for U.S. Company B).

Do component parts qualify for IC-DISC benefits?

 

No. If a component part is sold to a U.S. person that further manufactures, or includes that component in their product, the sale of the component part, although an indirect export sale, does not qualify for IC-DISC benefits. A facts and circumstances analysis is likely necessary to determine whether or not the component part sale can qualify. This issue was addressed by the U.S. Supreme Court in the GE case.