As important and intricate as all of the requirements and nuances surrounding an IC-DISC can be, there are few more significant and intricate than the calculation itself which produces the dollar savings amount for a company. As a taxpayer has such a specific time window during which he/she can calculate the final IC-DISC commission amount, it is vital that a taxpayer be able to correctly calculate the commission, and to also utilize the appropriate methodology to maximize their tax savings.
As with many other tax incentives and credits, there are shortcuts and high-level methodologies that can be utilized to calculate an IC-DISC commission amount. Many times, taxpayers are simply not aware of or are not capable of using complex methods and financial models to calculate the commission in more detail. This can result in the calculation of less tax savings than a company is entitled to. A prevalent misstep with respect to calculation methodologies is only using an aggregate method. Calculating the IC-DISC commission amount on an aggregate basis overlooks product lines’ profit margins, which creates great disparity in the commission. Other methods examine the different profitability levels of the company’s products or transactions, and typically produce more benefit from doing so. For example, if a company exports a product that is extremely profitable and another product with low gross margins, a taxpayer calculating the IC-DISC commission amount on an aggregate basis would be blending these two profitability margins. Thus, in lieu of generating higher commissions from the more profitable product , the IC-DISC commission amount is being reduced overall by blending the two profitability levels. The IRS can scrutinize and even disallow benefit if the method used to derive the commission is not reflective of a company’s export profits.
Additionally, another item to consider is how to appropriately allocate cost of goods sold (“COGS”) and indirect expenses since a company may not be able to track these amounts to each individual transaction or product. By not utilizing various methods to allocate COGS and expenses, per Internal Revenue Code §861, a taxpayer could be understating both gross and net profit amounts and thus, undervaluing the final commission amount.
As with other complex financial and economic transfer pricing calculations, there are many factors below the surface of the IC-DISC commission calculation, which at first blush, are not taken into consideration as to how each will affect the final number. Since the deduction, however, directly relates to a taxpayer’s tax liability, a business’s profitability, and its ability to remain competitive in an ever increasingly global market, it is crucial to understand the intricacies of the calculation. Oversight in the calculation can cost a company hundreds of thousands dollars’ worth of tax savings.