2016 tax consideration for certain exporters

As we await the well-publicized promises of changes in the tax landscape for 2017, one of the items on that list is the repeal of the 3.8 percent net investment income (NII) tax. The NII is of particular significance to companies that have interest charge domestic international sales corporations (IC-DISCs) because IC-DISC dividends have been subject to the NII since 2013.

Tax planning tip

If we assume that the NII will be repealed effective Jan. 1, 2017, and that the ultimate IC-DISC individual shareholders would be subject to the NII in 2016, then deferring IC-DISC dividend payments until 2017 would result in a permanent federal tax savings of 3.8 percent of the IC-DISC dividend amount.

Even if the NII is not repealed, the cost of the dividend deferral might only be an interest charge (at applicable federal rates (AFRs)) to be paid to IRS by the ultimate shareholder(s) on the deferred tax associated with the deferred dividends. The amount of interest charge is dependent upon the amount of deferred IC-DISC income (as reported in the IC-DISC tax return) which is determined by reference to the beginning and ending retained earnings of the IC-DISC for 2016. If the IC-DISC reports deferred income for 2016, then the shareholder(s) are required to file Form 8404 and pay an interest charge for the privilege of deferring their tax on the deferred income. Form 8404 is used to calculate the difference between the actual tax liability on the shareholder’s 2016 return and the theoretical tax liability that would be due if the deferred IC-DISC income had been included in the shareholder’s 2016 taxable income. This difference is the deferred tax associated with the deferred IC-DISC income to which the interest rate is applied. The rate is based on AFRs which are very low.

Not all IC-DISC situations would result in an interest charge, and it is easy to calculate and estimate the interest charge amount. Such interest charges are typically small and are reported and paid with the separately filed Form 8404. There may be many situations where an interest charge does not apply (by deferring the dividend payment) due to the manner in which “deferred DISC income” is calculated.

And there is no requirement that the 2016 commission payable to the DISC be paid until 2017. The deduction for the accrued commission at Dec. 31, 2016, could still be taken on the exporter’s 2016 tax return. It should be noted that at least 50 percent of the final commission amount be paid to the IC-DISC within 60 days after the IC-DISC year-end.

Generally speaking, deferral of IC-DISC dividends is the better option in light of the prospect of NII repeal.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.