All gross receipts from products and services giving rise to the IC-DISC commission must be qualified according to the requirements set forth in the Internal Revenue Code §993. Further guidance is outlined in the related regulations, §1.993, as well. However, not all export property is qualified to the letter of the law in our experience. Clients from other DISC providers are frequently noted to have non-qualified products and/or services that were qualified and included in the commission calculation. This results in obvious complications such as taking a benefit on products not specified by the tax code, violating the gross receipts test, and possible penalties.
The most common instance of non-qualified property being included is services outside of A&E and property that is not exported from the US. The only services that may be taken for DISC benefit are Architectural and Engineering for the construction of real property outside of the US. All other services must be qualified as related and subsidiary services and meet both of the tests under that particular section.
Fair Market Value
Another fairly common overlooked disqualification is non-exports. Although the definition of an export may vary given context, exporting is defined by some DISC users as a US company selling products to a non-US company, regardless of logistics. However, for the purposes of IC-DISC, the destination requirement specifically states that any property located outside of the US when purchased can only be deemed export property if it is imported to the US prior to subsequent sale.† Furthermore, the fair market value will apply to this property and it will be treated as being entirely foreign, even if the article was originally manufactured in the US.ǂ
Lastly, the fair market value requirement, also known as the US content test, poses issues for the qualification of physical export property. The test is an apple to orange test, as we refer to it. The requirement looks at the origination and costs of materials used in the production process of export products. This cost is then compared to the ‘fair market value’ of the product, or sales price. The test dictates that foreign material costs cannot account for more than 50% of the sales price. We have witnessed multiple variations of math to qualify products according to this 50% threshold, but unfortunately, there is only one way to compare imported costs to a product’s sales price.
Be wary of providers that are not detailing and substantiating this requirement. The proper qualification of export property is a critical step to ensuring the legitimacy of the deduction.
For more details on the qualification requirements, please consult IRC §993 and the corresponding regulations §1.993.
Please give us a call today at 713.877.9600 or email email@example.com if you would like to learn how you or your clients may qualify export incentives.