In the world of IC-DISC tax compliance, tax preparers might feel like they are navigating through unfamiliar territory. Guidance is scant and the terminology is fairly alien to most other, more familiar, areas of tax. The following are just a few of the twists and turns found in the labyrinth known as the 1120-IC-DISC.
One confusing element of IC-DISC filings is the endless list of ancillary forms that must be filed in addition to the 1120-IC-DISC. Even if a taxpayer is using the IC-DISC as a simple commission agent, certain circumstances will trigger supplementary filings. For example, exports to countries on the Treasury’s boycott list require a Form 5713 to be filed by the IC-DISC and the exporter. Interest charge assessed on deferred income mandates the filing of a Form 8804. Distributions to shareholders are not reported on a 1099-DIV, but rather on the Schedule K. Don’t forget your Schedule P, detailing the export transactions on a line-by-line basis. Finally, none of the IC-DISC forms can be filed electronically.
Knowing Your Distributions
Another set of rules capable of puzzling even the most adept preparer are those relating to deemed distributions. In many cases, the income of an IC-DISC cannot be deferred indefinitely, and even if cash does not exit the entity, distributions must be recognized. Reconciling which funds within the DISC have already been subject to taxation and which have not can be a daunting task the longer the entity has been around. What looks to the common observer like simple retained earnings must be carefully split up between various subaccounts with differing tax implications.
Defining Deferred Income
Perhaps the most vexing element in the IC-DISC filing world is the business of accumulated vs. deferred income. In the 1980s, DISCs (without the IC) existed as pure deferral mechanisms, where large corporations shoveled in export profits never to see taxation. Although the incentive evolved to target smaller businesses, the deferral rules stayed in place, following a convoluted last-in, first-out approach to distributing funds out of the IC-DISC. If the taxpayer (or their provider) did not follow these rules closely, they would subject themselves to the Interest Charge, or worse, violate rules relating to funds in the entity’s bank account, which could even lead to disqualification and loss of benefit.
As you can see, IC-DISC tax compliance is a mystifying task. As the last remaining export incentive—and a powerful one at that—it is not something that is easily claimed; thus, finding a preparer who is fluid with all the terminology and arcane rules is key to ensuring a successful filing.
Contact us today for more information on IC-DISC and how you could benefit from alliantgroup’s tax consulting services.