Interest Charge Domestic International Sales Corporations

An interest charge domestic international corporation (IC-DISC) is a domestic corporation that is designed to receive commissions on a company’s export sales.  Companies that export goods to foreign countries would greatly benefit from the tax savings of setting up an IC-DISC because IC-DISCs are generally not subject to tax.

There are two different ways to structure an IC-DISC.  One way is to set up the IC-DISC as a buy/sell entity.  This means that the IC-DISC owns the goods that it then sells outside the United States.  The second and most common way is to structure it as a commission IC-DISC.  This means that the IC-DISC sells goods outside the United States as if it were a commission agent for the distribution company.

Typically, the IC-DISC receives a commission from the exporter of goods and the commission is not taxable. The exporter, however, gets to deduct the commissions it pays the IC-DISC at ordinary income tax rates. The shareholders of an IC-DISC will pay tax on the income of the IC-DISC when they receive an actual or deemed dividend.  Taxable income attributable to the first $10,000,000 of gross receipts from the sale or exchange of qualified export asset is generally not included as a deemed distribution and will only be taxable to the shareholders when an actual dividend is received.  Taxable income attributable to any gross receipts in excess of the first $10,000,000 is taxable to the shareholders as if it has been distributed in the current year. Because of the tax benefit received, shareholders are required to pay an interest charge on deferred tax liabilities at qualified rates.

In order to make the election to be treated as an IC-DISC, a corporation must be organized in the United States and meet the following tests:

  • Have a tax year end that conforms to the tax year end of its principal shareholders
  • At least 95% of gross receipts for the tax year are qualified export receipts
  • Has qualified export assets whose adjusted basis at year-end equals at least 95% of the total basis of its assets
  • Has one class of stock and has stock outstanding with a par value of at least $2,500 on each day of the tax year
  • Keeps its own bank account and separate books and records
  • Makes a timely election to be treated as an IC-DISC
  • No more than 50% of the product’s fair market value can be from articles imported into the U.S.
While a corporation must meet these requirements to make the IC-DISC election, it does not need to have an office, employees, or tangible assets.
The tax benefits of an IC-DISC are only available for exports made after the IC-DISC election is made.   Having an IC-DISC allows you to convert ordinary income from commissions taxed at your marginal rate to a qualified dividend, giving you tax savings of up to 20%.

Valuable Tax Credits Available to Contractors

Many Federal and Georgia tax credits are available to contractors, though they are often overlooked and go unused. With proper planning and assessment, these credits can go a long way toward improving a contractor’s bottom line. Following is a summary of some of the more recognizable credits available. In the coming months we will delve into the details of each type of credit.

Research & Development (“R&D”) Tax Credit
The R&D Tax Credit is a Federal credit introduced in 1981 as a boost of the economy. Usage became so prolific that many states, including Georgia, created their own version of the R&D Tax Credit. In general, the R&D Tax Credit is to help a company offset dollar-for-dollar incremental research expenses. Contractors may be eligible for the credit, for example, if new processes or materials are being used in construction or installation. In addition, contractors who assist clients with design work are often eligible for the credit. This credit was made permanent with the passage of the Protecting Americans from Tax Hikes Act of 2015.

Work Opportunity Tax Credit (“WOTC”)
The WOTC is a Federal credit provided to employers hiring persons belonging to specific groups, and there are special guidelines with extended credit for qualified veterans. In general, the credit can be equal to 40% of first-year wages up to $6,000. The Protecting Americans from Tax Hikes Act of 2015 extended the hiring deadline to January 1, 2020, meaning the employee must be hired and start working before that date to be counted as part of this credit.

Georgia Retraining Tax Credit
The Georgia Retraining Tax Credit is only a Georgia credit. The purpose is to encourage employers to continually invest in their employees by upgrading equipment, acquiring new technology, and completing ISO 9000 training. The annual maximum credit is $1,250 per employee. This credit is available to any business that files a Georgia income tax return.

The three credits described above are not an exhaustive list and there may be more Federal and Georgia credits that apply specifically to your business. HLB Gross Collins, P.C. has been serving some of the Southeast’s most prominent construction companies for nearly 50 years. Our Construction Practice works closely with the clients to ensure that they are taking advantage of all available credits and savings opportunities.

Clearer Standard for Business/Asset Acquisitions

On January 5, 2017, the FASB issued Accounting Standards Update (ASU) 2017-01 to clarify the definition of a business.

Determining whether the net assets being acquired constitute a business under Accounting Standards Codification (ASC) 805 is critical. The accounting for a business combination is significantly different than an asset acquisition. In an asset acquisition transaction costs, which are often significant, are capitalized but would be expensed under ASC 805, business combination, accounting.  Other costs such as in-process research and development (IPR&D) and contingent consideration are recorded on the balance sheet in a business combination but expensed or recognized when the contingency is resolved in an asset acquisition.

The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include inputs, at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606.

We expect this to impact many of our clients in the real estate industry. For example: Company A purchases a portfolio of three multi-family apartment complexes that each has in-place leases.  Company A assumes the existing outsourced landscaping and security contracts for the properties. No other elements (e.g., employees, assets, substantive processes) are included in the acquired assets.  Company A determines substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.  As a result, Company A concludes that the acquired assets are not a business and does not account for the acquisition under ASC 805.

This becomes more complicated when the acquisition includes and operating company and the employees, all the contracts, operating IT and processes are being acquired. If the example above was for three skilled nursing facilities and all of the contract, IT, employees and processes were being acquired, then Company A would likely conclude this was a business acquisition and account for it under ASC 805.

This ASU is effective for private entities for periods beginning after December 15, 2018, but early adoption is permitted.

Please reach out to us if you have any questions regarding the new standard or other acquisition account issues.

HLB International Appoints New Member in Brazil

HLB International, one of the leading global accountancy networks with presence in 140 countries, continues its growth with the recent signing of a new member firm in Brazil – Grupo Boucinhas.

Grupo Boucinhas is based in São Paulo, Rio de Janeiro, Belo Horizonte, São Caetano, Porto Alegre plus Miami (FL) with operational bases in Belém, Recife and Brasilia. Established in 1936, the firm is active in the areas of consulting, auditing and inventory services.

Celeste Boucinhas, Partner of Boucinhas Group, commented: “We are very honored to be a new member of HLB and truly believe that an international presence will contribute to our growth as a firm and as professionals. Being part of a dynamic network brings not only new clients, but also peer networking opportunities and career development to our executives.”

Grupo Boucinhas will work closely with other HLB members in Brazil and makes a great addition to our coverage across Latin America.

Wealth Management is a Re-Balancing Act

Studies indicate that savvy asset allocation may lead to long-term investment success. Individuals can find a desired mix of riskier asset classes, such as stocks, and relatively lower risk asset classes, such as bonds. Sticking with a chosen strategy might deliver acceptable returns from the volatile assets, as well as fewer fluctuations along the way from the stable assets. An asset allocation could consist of a simple blend of stocks and bonds, plus an emergency cash reserve. Alternatively, an asset allocation can include multiple asset classes, ranging from small-company domestic stocks to international mega corporations to real estate.

Investors may put together their own asset allocation, or they might work with an investment professional. Either way, the challenge is to maintain the desired allocation through the ups and downs of the financial markets. The answer generally recommended by financial advisers is to re-balance periodically.

Sell high, buy low

Once your asset allocation is in place, it can be reviewed at regular intervals or after significant market moves.

Example 1: Ellen King has a basic asset allocation of 60% in stocks and 40% in bonds. However, the bull market of recent years moved her portfolio to 75% in stocks and 25% in bonds. Ellen is uncomfortable with such a large commitment to stocks, which have crashed twice in this century.

One solution is for Ellen to move money from stocks to bonds, going back to her desired 60-40 allocation. Many investors are reluctant to follow such a plan, leaving a hot market for one that’s out of favor. Nevertheless, investors who follow market momentum—buying what’s been popular and selling what’s been devalued—historically have received subpar results. Going against the crowd by buying low and selling high may turn out to be more effective.

Tax trap

Re-balancing is inherently an inefficient tax process. Investors are always selling assets that moved above the desired allocation, which generally means taking gains. Such gains can be taxable and may add to an individual’s reluctance to re-balance.

How can investors rebalance their asset allocation without feeling whipsawed by taxes? Here are some possibilities:

  • Bite the bullet. As long as the securities are held for more than 12 months, profits on a sale will qualify for long-term capital gains rates, which are lower than ordinary income tax rates. Paying some tax may be worthwhile if it reduces portfolio risk. Also, if Ellen has a diversified mix of stocks and stock funds, she could selectively sell long-term shares with the least appreciation, resulting in the lowest tax bill, unless she believes there are investment reasons to sell her big gainers.
  • Don’t sell. If there are no sales, no tax will be due.
    • Example 2: Assume that Ellen’s portfolio consists of $100,000 in bonds and $300,000 in stocks. Instead of selling stocks, Ellen could hold on to them and avoid a taxable sale. Meanwhile, her future investing could go entirely into bonds; dividends from her stocks and stock funds could be invested in bonds and bond funds. Gradually, her asset allocation would move from 75-25 to 70-30 to 65-35, heading towards her 60-40 goal.
    • Suppose that Ellen is retired, spending down her investment portfolio instead of building it up for the future. In this situation, Ellen could tap her stocks for income, decreasing her allocation. To hold down taxes, she could liquidate stocks selectively, as mentioned.
  • Bank losses. Investors may hold various positions in individual securities and funds, including some that have lost value since the original purchase. Health care stocks and funds, for instance, generally had losses in 2016, although the broad market had gains. When price drops on specific holdings are significant, a sale can generate a meaningful capital loss, perhaps making rebalancing easier in the future (see Trusted Advice column “Gaining From Losses”).
  • Use tax-favored retirement accounts. Taking gains inside plans such as 401(k)s and IRAs won’t generate current taxes. Therefore, Ellen may be able to do some or all of her rebalancing, tax-free, by moving from stocks to bonds within her IRA. This tax-efficient flexibility may be one factor to consider when deciding whether particular investments should go into a taxable or a tax-deferred account. Holding a mix of asset classes on both sides may permit more tax-efficient rebalancing.

The methods described here are not mutually exclusive. You might find that combining tactics will help you re-balance and maintain your asset allocation without triggering steep tax bills.

Gaining From Losses

  • If your capital losses in a calendar year exceed your capital gains, you will have a net capital loss to report on your tax return for that year.
  • Up to $3,000 of net capital losses can be deducted on your tax return each year.
  • Larger net capital losses can be carried over to future years.
  • By accumulating losses, you may eventually be able to take taxable gains when you rebalance yet owe little or no tax due to losses taken in prior years.
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