Grasping 1120-IC-DISC instructions is a must before you begin filling out this critical tax form. Active and past IC-DISC companies must complete the IRS form ahead of the deadline to reduce federal income taxes for the past tax year.
What instructions must companies follow when completing Form 1120-IC-DISC?
1120-IC-DISC has 12 sections (A through O) that current and past Interest Charge DISCs must complete. The president, vice president, chief accounting officer, treasurer, assistant treasurer, or corporate officer must sign the forms, which must be filed within nine and a half months after the end of the tax year (unless it’s not a business day). Attaching additional forms may be required when filing.
This overview of Form 1120-IC-DISC instructions will explain the basics of this tax incentive, provide information on the 1120 IC-DISC, and help you file it before the deadline.
Overview of IC-DISC
An Interest Charge Domestic International Sales Corporation is a corporate entity formed by businesses selling products or goods outside the United States.
A corporation interested in applying for this non-taxable status must file Form 4876-A, Election To Be Treated as an Interest Charge Disc.
Once the US government recognizes a corporation as an Interest Charge DISC, the corporation must file taxes every year even if no payments are due. These taxes must be filed separately from the corporation’s taxes, as one requirement of IC-DISC status is separate record-keeping.
That’s where Form 1120 IC-DISC comes in. IC-DISCs must file this tax form yearly with the IRS to report gross income, inclusions, deductions, dividends, gross receipts, and more.
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Step-by-Step Guide to 1120-IC-DISC Instructions
Let’s get into what you’ve eagerly awaited: Form 1120 IC-DISC instructions.
Step 1: Determining Qualifying Export Activities
Under the IRS’s 1120-IC-DISC instructions, qualifying export activities include export property sold and delivered to buyers outside the US.
Products are manufactured or produced in the US if most manufacturing and operations occur in the US, most transformation happens in the US, or the corporation incurs 20 percent of its conversion costs in the US.
Step 2: Setting Up and Structuring the IC-DISC
Your corporation must elect IC-DISC status on Form 4876-A [1] before completing Form 1120 IC-DISC. A corporation will form an Interest Charge DISC outside its main business structure. A shareholder or exporter must own it.
The exception lies in C companies. They can form IC-DISCs but must share ownership among the two entities.
According to the IRS’s 1120 IC-DISC instructions, if an Interest Charge DISC fails to pass the qualified export or gross receipts tests but does a pro-rata property distribution to its shareholders to meet the requirements, the IRS considers the corporate entity an Interest Charge DISC.
Step 3: Calculating and Allocating Income
1120-IC-DISC instructions require companies to calculate their income. Schedule A, Cost of Goods Sold, requests the following information:
- Cost of goods sold
- Inventory at the start of the year
- Inventory at the end of the year
- Costs of labor
- Purchases
Schedule B, Gross Income, asks for this information of Interest Charge DISCs:
- Qualified export receipts from export property sales
- Foreign sales through related foreign entities
- Direct foreign sales
- Renting or leasing of export property
- Subsidiary and related services of a qualified export lease or sale
- Architectural or engineering services
- Producer’s loan interest
- Export management services
- Capital gain net income
- Qualified inclusions and dividends
- Nonqualified inclusions and dividends
- Nonqualified gross receipts
Schedule C
Schedule C, Dividends, Inclusions, and Special Deductions, tracks all dividends the IC-DISC makes, including those from domestic companies where the Interest Charge DISC has 20 percent or more/less of stock.
Schedule E
Schedule E, Deductions, calculates all deductions of the IC-DISC according to the IRS’s Limitations on Deductions instructions, including warehousing, export promotion expenses, maintenance and repairs, and profit sharing.
Schedule J
Schedule J, Deemed and Actual Distributions and Deferred DISC Income for the Tax Year, is divided into several parts:
Part I – Deemed Distributions Under Section 995 (b)(1), measures areas like gross interest from producer loans and gains on exchanges and sales. However, companies must add some values here, then subtract others to get an accurate total.
Part II – Section 995(b)(1)(E) Taxable Income, requires totaling statutory minimums and maximums with total qualified export receipts. Part III – Deemed Distributions Under Section 995(b)(2) measures total deemed distributions.
Schedule J, Deemed and Actual Distributions and Deferred DISC Income for the Tax Year, calculates the Interest Charge DISC’s distribution totals. Schedule L, Balance Sheets per Books, is a balance of all total assets.
Schedules M
Schedules M include M-1, Reconciliation of Income per Books With Income per Return, which measures net income losses, capital losses, expenses, itemized recorded income, and itemized deductions.
Schedule M-2, Analysis of Other Earnings and Profits, tracks balance changes throughout the year and itemized increases and decreases.
Schedule M-3, Analysis of Previously Taxed Income, does the same, but with taxed income, as does Schedule M-4, Analysis of Accumulated IC-DISC Income, but with Interest Charge DISC earnings.
Schedule N
Schedule N, Export Gross Receipts of the IC-DISC and Related U.S. Persons, calculates the total export gross receipts as a percentage.
Step 4: Reporting and Compliance of Form 1120 IC-DISC
Maintaining compliance with this IRS tax form requires understanding all 1120-IC-DISC instructions.
The filing deadline is the 15th day of the ninth month after the tax year ends. Only if that day falls on a holiday or weekend are exceptions allowed.
The tax return requires a signature and date, which the president, vice president, corporate officer, accounting officer, treasurer, or assistant treasurer can sign. However, if an assignee, trustee, or receiver files the form, a corporate officer cannot sign it. Instead, a fiduciary must do so.
Step 5: Maintaining IC-DISC Status
companies that wish to retain their status must continue filing Form 1120 IC-DISC by the deadline every tax year and maintain the qualifications required of Interest Charge DISCs. Export Tax Management Inc. can keep your corporation compliant to ensure long-term IC-DISC benefits.
Contact our qualified tax experts today to learn more about your options.
Understanding IC-DISC Basics
Congress debuted the IC-DISC tax incentives for United States-based businesses in the 1970s, and this permanent incentive has broadened exports across the globe.
Eligibility Criteria for IC-DISC Status
Besides the aforementioned need for separate books and records for an IC-DISC, the following criteria for companies considering this status are:
- Pass an assets test, where its qualified export assets (on an adjusted basis) are at least 95 percent of all the corporation’s assets (on an adjusted basis) by the end of the year.
- Pass a gross receipts test (income from an accounting period without deducting expenses or costs), where 95 percent of the gross receipts must be qualified export receipts or QERs or qualified export receipts, gross receipts for export property sales.
- Have at least $2,500 in one stock class.
- Must be qualified as a domestic corporation.
IC-DISC Advantages
Companies that sell goods or services to international customers as an IC-DISC can enjoy the following tax benefits:
- Reduced tax rates on qualified export income, with dividends to shareholders taxed at 23.8 percent.
- Increased capital to spend on product/service development, marketing, increased manpower, and more warehousing or storage.
- Broadened business presence worldwide, leveraging the company’s brand strength and power.
- More sales from a larger customer base and increased capital from the Interest Charge-DISC tax incentives.
- Competitive advantage over industry companies that have not implemented IC-DISCs.
Form 1120 IC-DISC Benefits and Limitations
As said, IC-DISC is advantageous for many companies, especially once they grasp Form 1120-IC-DISC instructions. However, it’s important to consider whether this is the right tax incentive for you.
For example, if you’re just breaking into foreign products and services and are unsure of the long-term potential of that business decision, you might reconsider applying as an Interest Charge DISC.
Here’s an overview of the advantages of this tax incentive.
- Permanence: With other tax incentives that US-based, foreign-exporting companies look into such as the Foreign-Derived Intangible Income or FDII succumbing to lower tax rates as the 2020s unfold, the long-term tax potential of IC-DISC, which has decades of tax advantages behind it, is alluring to companies.
- Lower tax liability: Between the reduced rate of federal tax payments, the tax-free income, and the deferments, companies with IC-DISC status can expect reliably lower tax payments year after year.
- Allows for normal operations: A corporation does not need to change its structure or day-to-day business dealings once applying for Interest Charge DISC status. They must maintain a foreign presence; otherwise, their business remains the same.
- Bolsters the economy: The impetus for creating IC-DISC tax advantages stemmed from the need for the US to strengthen its economy and expand into foreign territory. Electing to become an Interest Charge DISC continues in the spirit of the creation of this tax incentive.
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Export Tax Management Inc. can help your corporation navigate the ins and outs of tax forms and Form 1120-IC-DISC instructions to maintain non-taxable status and defer your payments.
