Tax Savings for A&E Firms with International Projects
IC-DISC benefits can be substantial for any company that sells or leases export property.
Since 1984, many U.S. manufacturers that produce goods in the United States and export them have been taking advantage of an export tax incentive called Interest Charge‐Domestic International Sales Corporation, or IC‐DISC. But an IC‐DISC is not just for exporters of manufactured goods. While IC‐DISC benefits don’t apply to most services, gross receipts from engineering and architectural services for construction projects located outside the United States may qualify.
Due to recent legislation to extend capital gains rates for qualified dividends, establishing an IC‐DISC with the correct ownership structure could result in a permanent tax savings of 20 percentage points or higher on export profits.
Establishing an IC‐DISC
An IC‐DISC is a separate corporate entity that is established by a U.S. firm or some of its owners. The IC‐DISC is a domestic “paper” corporation that may be established in any state in the United States. It has no impact on the way a firm does business. Tax benefits are only applicable to commission income paid to the IC‐DISC earned and received after the entity is created.
Architectural and engineering firms often overlook IC-DISC benefits that can apply to projects located (or proposed for location) outside the United States. A wide variety of architectural and engineering services and projects qualify for these savings. Qualified services, such as consultation, planning design, drawing and specifications, feasibility studies and supervision may be performed in or outside of the United States. Projects such as site preparation, equipment installation, erection, expansion or major repairs of buildings or structures like road, dams, canals, bridges, tunnels, railroad track and pipelines may also qualify.
How It Works
An IC‐DISC associated with an architectural and engineering firm can earn a profit generally equal to the higher of:
- four percent of qualified export gross receipts; or
- 50 percent of export taxable income of the firm.
There are some limitations based on the firm’s overall taxable income, but the firm is entitled to a full tax deduction at ordinary income tax rates for the profits earned by the IC‐DISC.
While the firm receives a full tax deduction at ordinary tax rates, the IC DISC pays no U.S. federal tax on the income received. The IC-DISC distributes earnings to its shareholders (who may or may not be the same shareholders who own the architectural and engineering firm), who pay tax on the distributions at qualified dividend rates (up to 23.8 percent).
While IC‐DISCs typically distribute all earnings each year to take advantage of the rate difference, the structure has the flexibility to time cash flows if necessary. Any undistributed IC-DISC earnings are subject to a small annual interest charge.
Only individuals—as direct IC-DISC shareholders or owners of pass-through entities such as S corporations, LLCs or trusts—are entitled to the qualified dividend income tax rate, but closely-held corporations can also benefit from the IC-DISC ownership structure. IC-DISC benefits can be substantial for an architectural and engineering firm that works internationally—and are equally beneficial for any company that sells or leases export property. If your company is involved in any of these activities, it is an opportunity that you will want to explore. iBi
Joe Glawe is a tax principal for CliftonLarsonAllen. For more information, visit claconnect.com.