An IC-DISC tax return unlocks incentives for your corporation, from deferrals to lower tax rates. You must file these annual tax returns as you maintain Interest Charge Disc status. How does this tax return work?
Eligible corporations must file Form 1120 IC-DISC tax returns every year within nine months after the end of their most recent tax year. The deadline is the 15th of that month. File a Form 1120 IC-DISC tax return even when not paying federal income taxes within the tax period, such as receiving commissions and deferring payments until the $10 million threshold.
This handy introduction to tax returns for your corporate structure will help you understand the required instructions and filing steps, reducing your tax-time headaches.
Quick Overview of the IC-DISC Tax Return
An Interest Charge Domestic International Sales Corporation must file returns annually in perpetuity unless and until the entity decides to revoke that status. Even then, former IC-DISCs must still file Form 1120 with the IRS for its final tax year.
Forming an IC-DISC creates a non-taxable entity. You must sell foreign products or goods and be based in the United States, the most basic eligibility criteria.
You don’t need an office or make direct sales under the IC-DISC; it helps the corporation reduce its tax liability.
Filing accurate Form 1120 IC-DISC tax returns puts your entity in the best position to kickstart benefits like reduced federal income tax.
That begins with accurate return filing. You’re already one step closer to tax incentives when you entrust your revenue return to Export Tax Management. We specialize in structuring, incorporating, and implementing IC-DISCs, including preparing IRS Form 1120 IC-DISC tax returns.
Don’t wait until your tax deadline approaches. Reach out to Export Tax Management today to discuss your tax filing needs.
Quick Overview: What Does the IC-DISC Tax Return Entail?
Gear up for your tax benefits with these tips for filing returns.
Forms Required to Be Filed
The tax form your corporation needs is Form 1120-IC-DISC. The form is called Interest Charge Domestic Sales Corporation Return and includes several sections or schedules marked A to O.
The sections detail income generated by your Interest charge corporation, including the cost of goods sold, dividends, gross income, deductions, inclusions, distributions, deferments, and reconciliations.
Depending on your responses to sections of Form 1120 IC-DISC, you may need to attach additional tax forms or information when filing.
Deadlines to Be Met
Your tax return is due within nine months after the cessation of your corporate tax year. The IRS requires the return to be filed by the 15th.
For example, if your tax year ended in February, you could file no later than November 15th.
However, if November 15th falls on a weekend or legal holiday, you could wait until the next business day to file and not be late.
Penalties for Late or Incorrect IC-DISC Tax Returns
The IRS institutes a penalty if you file incorrectly, so following tax return instructions is key.
You will receive a penalty fee for late filings.
The penalty also applies if you made any mistakes on the taxation form or didn’t include all relevant information.
Commission Calculation on IC-DISC Tax Return
When you must pay dividends to your shareholders on the commission, you aren’t taxed on the dividends at ordinary federal tax rates. Instead, it’s only taxed as a qualified dividend, increasing your permanent tax rate arbitrage.
Components of Commission Calculation
IC-DISCs use one of the following methods for calculating commission.
50 Percent of Combined Taxable Income on Export Sales
The other two methods are more straightforward, offering both parties less wiggle room to set prices. Under this second option, your export tax corporation should calculate the amount of export sales you made over the recent tax year.
Next, determine the combined taxable income. The commission amount would be 50 percent of that.
Four Percent of Qualified Export Receipts
You can also use qualified export receipts as a commission calculation. QERs are gross receipts from services related to any lease, sale, or subsidy supplied by the IC-DISC. After calculating this value, you can use four percent of the QERs as the basis of your commission.
Preparation of the IC-DISC Tax Return
As you prepare to file your yearly income tax returns, don’t miss these instructions for accuracy and correctness. You won’t have to stress about the late fee.
1. Gathering the Necessary Financial Information
First, you need financial information for the most recent tax year. You must file taxes separately for your corporation versus the IC-DISC, so double-check that there isn’t any bleed-over in your financial information.
You should also have a copy of your completed Form 4876-A, Election to Be Treated as an Interest Charge DISC.
2. Determining the Commission
The above two methods allow you to determine an appropriate commission between your exporter and IC-DISC. Ensure you’re on the same page before filing your income tax returns.
3. Complete the Relevant Forms
Besides Forms 4876-A and 1120 IC-DISC, your IC-DISC should complete Form 8404, Interest Charge on DISC-Related Deferred Tax Liability. This form can apply to estates, individuals, or corporations.
It requires a shareholder’s full name, address, identifying number, and the IC-DISC’s identifying number.
4. File Forms 1120 IC-DISC and 8404
File your IC-DISC tax return with the U.S. Postal Service at this address: Department of the Treasury, Internal Revenue Service Center, Kansas City, MO 64999.
5. File on Time
Confirm the deadlines for the tax returns and file them in advance if possible so you don’t have to worry about late penalties.
Here are some additional tips to help you around tax-filing time:
- Reread all tax information after you complete it, ideally after taking a break or even the next day. This will help you determine if you missed any lines or mistyped.
- Use a calculator to confirm the accuracy of all your math.
- Keep good records to make filing taxes less stressful each year.
- Consult with tax professionals to ensure you file your IC-DISC tax return correctly.
Export Tax Management can help with your tax return preparation and other forms required of IC-DISC. Send us a message today, and we’ll create an action plan.
Additional Info Related to IC-DISC Tax Returns
As you begin drafting your income tax returns, consider these points.
IC-DISC Benefits
Besides the aforementioned commission structure IC-DISC can use, other IC-DISC benefits include deferred taxes.
As you retain your commission to the $10 million threshold, you can grow your business in many ways, whether through an export business loan, new products and services, new hires, or warehousing.
Form 1120-IC-DISC
Form 1120-IC-DISC is an integral part of maintaining your non-taxable status as an IC-DISC. You must file this multi-section form every year to continue enjoying tax breaks.
Book a Consultation Now
Filing an IC-DISC tax return is the only way to maximize your tax benefits. Export Tax Management will navigate your corporation through these unchartered waters with services such as tax declaration, guidelines for export tax corporations, and tax filing.
