IC-DISC Incentives Remain, but a November Senate Bill Considered Termination
On December 2, 2017, the Senate removed the repeal of IC-DISC from their tax reform bill.
U.S. exporters, take note: the IC-DISC tax incentives hang in the balance.
While the House’s originally proposed tax reform legislation leaves the IC-DISC provisions as they are, the Senate’s version of the Tax Cuts and Jobs Act repeals them altogether on December 31, 2018. This will reportedly raise revenues by $5.3 billion over 10 years.
The proposed Senate bill automatically terminates the election of the C corporation to be treated as an IC-DISC for the corporation’s taxable year that begins in 2018. The effect of the termination on your IC-DISC shareholders would be deemed a distribution of the IC-DISC’s accumulated DISC income (i.e., untaxed and undistributed IC-DISC earnings) as of the first taxable year the termination is effective. The distributions are deemed to be received by the IC-DISC shareholders) in equal instalments over 10 taxable years, and the distributions are not treated as qualified dividend income receiving the lower capital gains rate.
IC-DISC tax planning considerations for possible repeal
Although the repeal of the IC-DISC is not certain, it may be prudent to have discussions with your tax advisor to consider the potential effect on your corporation and address any transition issues. Possible planning considerations may include:
- Estimate the IC-DISC commission for the tax year prior to the termination year and distribute 100 percent of the accumulated DISC income before the termination year. This will maximize the benefit from qualified dividend treatment. If the IC-DISC has used an “evergreen dividend” policy, the accumulated DISC income would be automatically distributed at the end of the tax year prior to the termination year. This approach will accelerate income into one year (rather than being spread over ten taxable years). The benefit of this approach, however, is that qualified dividend treatment will be obtained.
- If the IC-DISC has deferred recognition of its accumulated DISC income to the IC-DISC shareholders by using producer’s loans, then settlement of the loans and the related tax consequences may need to be addressed well in advance of the IC-DISC’s termination year, depending on the cash and debt position of the related supplier.
- To avoid tax-filing requirements for the termination year, consider the legal dissolution of the C corporation on which the IC-DISC was made as of the last day of the IC-DISC taxable year before the termination year. This will require coordination with your corporation’s attorney.
- Many IC-DISCs are owned by flow-through entities (i.e., S corporations, partnerships, and LLCs). Depending on the tax treatment of pass-through income, the benefit from continued use of the IC-DISC for taxable years after 2017 may need to be evaluated.
How we can help
CLA’s IC-DISC professionals can help you assess the impact of the potential repeal on your corporation and judiciously plan ahead for an array of possible scenarios.