The
current Federal tax system allows international exporters to take advantage of an
Interest Charge Domestic International Sales Corporation (DISC). By using a
DISC, a portion of the international export income can be taxed at the
favorable long term capital gains rate of 15% as opposed to ordinary income
rates that may be as high as 35% for individuals. The average manufacturer with
$5 million in international sales and a 20% profit margin can reduce their
Federal tax liability by approximately $100,000. The DISC tax incentive can be
utilized by closely held businesses with $1 million to $100 million of export
revenue.
In order to
qualify for DISC benefits the following three components must be present in the
exported goods or software:
1. The product being sold must be
manufactured, produced, grown or extracted in the United States by a person
(person meaning the exporting company) other than the DISC.
2. The end use of the property must be
outside of the United States.
3. The product must not include imported
raw materials that account for more than 50% of the final sales price.
The DISC
is invisible for most purposes except for tax filings. The DISC has no economic
substance and does not require any change in operations for the export company.
DISC’s are
also available for companies that buy US manufactured products and resell those
products internationally and architects and engineers with international
projects. Additionally, a DISC can also be owned by a ROTH IRA or trusts for
the business owner’s children.
Will
the DISC be useful post 2012?
A DISC
will provide a reduced tax liability as long as there is a spread between the
highest ordinary income tax rate and the long term capital gains rate. If the
Bush/Obama tax cuts expire the maximum individual tax rates will increase to
39.5%. If the “Buffet Rule” is enacted, the long term capital rate will most
likely increase to 30%. At the 39.5% rate for ordinary income and 30% rate for
capital gain income a DISC will reduce the tax rate by 9.5% instead of the
current 20%. At 9.5%, the DISC will still be a powerful tax tool, but the
revenue required to make a DISC start to make sense will increase to $2 million
in export sales.
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Joe Bishop
is a Certified Public Accountant at Nasif, Hicks, Harris and Co., LLP. Joe can
be reached via phone at (805) 979-9383, email at JBishop@nhhco.com, or Linkedin at http://www.linkedin.com/in/joebishopcpa.
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