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Tax Savings for Architecture and Engineering Firms With International Projects
Since 1984, many U.S. manufacturers that produce goods in the United States and export them have been taking advantage of an export tax incentive called an Interest Charge-Domestic International Sales Corporation, or IC-DISC. But an IC-DISC is not just for exporters of manufactured goods. While IC-DISC benefits don’t apply to most services, gross receipts from engineering and architectural services for construction projects located outside the United States may qualify.
Due to recent legislation to extend capital gains rates for qualified dividends, establishing an IC-DISC with the correct ownership structure could result in a permanent tax savings of 20 percentage points or higher on export profits.
Establishing an IC-DISC
An IC-DISC is a separate corporate entity that is established by a U.S. firm or some of its owners. The IC-DISC is a domestic “paper” corporation that may be established in any state in the United States. It has no impact on the way a firm does business. Tax benefits are only applicable to commission income paid to the IC-DISC earned and received after the entity is created.
IC-DISC savings for engineering and architectural services
Architectural and engineering firms often overlook IC-DISC benefits that can apply to projects located (or proposed for location) outside the United States. A wide variety of architectural and engineering services and projects qualify for these savings.
Qualified services, such as consultation, planning, design, drawings and specifications, feasibility studies, and supervision may be performed in or outside the United States. Projects such as site preparation, equipment installation, erection, expansion, or major repairs of buildings or structures such as roads, dams, canals, bridges, tunnels, railroad tracks, and pipelines may also qualify.
How it works
An IC-DISC associated with an architectural and engineering firm can earn a profit generally equal to the higher of:
- 4 percent of qualified export gross receipts
- 50 percent of export taxable income of the firm
There are some limitations based on the firm’s overall taxable income, but the firm is entitled to a full tax deduction at ordinary income tax rates for the profits earned by the IC-DISC.
While the firm receives a full tax deduction at ordinary tax rates, the IC-DISC pays no U.S. federal tax on the income received. The IC-DISC distributes its earnings to its shareholders (who may or may not be the same shareholders who own the architectural and engineering firm) who pay tax on the distributions at qualified dividend rates (up to 23.8 percent). While IC-DISCs typically distribute all earnings each year to take advantage of the rate difference, the structure has the flexibility to time cash flows if necessary. Any undistributed IC-DISC earnings are subject to a small annual interest charge.
Only individuals, as direct IC-DISC shareholders or owners of pass-through entities, such as S corporations, LLCs, or trusts, are entitled to the qualified dividend income tax rate. Closely held C corporations can also benefit from the IC-DISC ownership structure.
How we can help
IC-DISC benefits can be substantial for an architectural and engineering firm that works internationally. CliftonLarsonAllen’s experienced professionals can help you evaluate your qualification requirements and determine how to properly form your IC-DISC. We analyze your tax savings potential based on the unique qualifying international activity of your firm.
We can also support you by making sure your tax returns are properly filed in coordination with your annual tax return filings. To maximize IC-DISC benefits for architectural and engineering firm takes intentional planning — CliftonLarsonAllen can help.