In a previous post, we discussed industries that are commonly overlooked when considering an IC-DISC. In this post, we will go into greater detail of some products that many companies are not taking into consideration when generating a list of qualified export property. We will explore a few situations where a company may not believe its export product qualifies for the IC-DISC benefit, when in reality, money is being left on the table.
Of course, the first thing that comes to mind when discussing the IC-DISC is whether or not a business has exports. This requirement seems quite obvious and one would think that most, if not all companies, would be able to recognize all the products that are shipped to foreign destinations. However, there are several businesses that may have even more exports than originally factored. Several businesses simply overthink this requirement and disqualify products that are sold to companies headquartered in the United States, but the products are shipped to locations in other countries. A detail to consider when evaluating potential qualifying products is the country of ultimate use, not the company the product is sold to. Export products do not even need to be shipped directly to a foreign country in order to qualify for the IC-DISC benefit. The Internal Revenue Code sections governing the IC-DISC allow the inclusion of products sold by the company taking the benefit through various distribution channels with stops in the United States before eventually reaching foreign destinations. If a company is aware that certain distributors or freight forwarders that it sells to are shipping its products to foreign countries, it has export sales. For these situations, the company will need confirmation that the products are shipped outside of the United States within one year of the sale and are not subject to further manufacturing in the meantime. Please contact us regarding the types of documents required and accepted to verify export sales sold in this fashion.
As mentioned above, with regard to indirect exports, the products cannot be subject to further manufacturing before reaching its foreign destination. Unfortunately, the tax code does not provide deeper insight concerning this part of the requirement beyond its one mention; so many companies conservatively discount any products that are modified in any way after it has left the company’s facility. For further guidance, there are several case studies regarding this rule; in particular for companies to review while evaluating products.
Additionally, as you may be aware, the Internal Revenue Code Section 993(c)(1)(c) defines that foreign material cost cannot represent more than 50% of the products selling price or “Fair Market Value.” One mistake we have observed of companies with an existing DISC is having a narrow view on the cost of this rule. It is often believed that foreign material costs are too large of a percentage of the total material cost, or even the total cost of goods sold. The fair market value requirement, however, is comparing foreign material costs to the selling price of the product. In some extreme cases, a company could have materials strictly from foreign sources and still have a qualified product. This is possible if the company’s markup is high enough that material costs in general do not make up more than 50% of the product’s selling price.
In conclusion, understanding the requirements and doing your due diligence are vital in identifying your tax savings under the IC-DISC tax incentive. An experienced consultant can be extremely helpful in guiding you through this process and ensuring you are claiming the full benefit on your exports.
Contact us today for more information on IC-DISC and how you could benefit from alliantgroup’s tax consulting services.