IC-DISC Interest Charge – Domestic International Sales Corporation & Federal Tax

1. IC-DISCInterest Charge – Domestic International Sales Corporation & Federal Tax Kevin Heyde, CPA Kentucky Export Initiative Ready, Set, Export!

2. Today’s Objectives • Explain the tax benefits of an IC-DISC to your company and shareholders • Rules to qualify for IC-DISC benefits • How to establish an IC-DISC • For our discussion today we will be discussing IC-DISC that is a “Commission DISC” not a “Buy/Sell DISC” • Federal Tax

3. Should Your Company Consider an IC-DISC? • Does your company export products? • Would my company and shareholders benefit from an IC-DISC? • Are products exported produced, grown or extracted from U.S. source (new or used) majority content of US value (>50% value U.S.)? • Does your company provide services e.g. engineering or architectural services for construction project outside of U.S.? • Is your company a pass through entity such as an S-Corporation or Partnership or a closely held C-Corporation?

4. Qualified Export Receipts & Export Property • “Export Property” is property: • Manufactured, produced, grown, or extracted in the U.S. by person other than DISC • Not more than 50% of fair market value of export property is attributable to imported materials into the U.S. • Selling price - $100,000 • Cost of imported materials included in property sold - $50,000 • Percent of Foreign content - 50%

5. IC-DISC Tax Savings & Benefits • IC-DISC is exempt from federal income tax • Exporter (Supplier) deducts commission paid to IC-DISC, i.e. reducing taxable income flowing to shareholders taxed at 35%, tax savings re: deduction • IC-DISC pays dividend to its shareholders which is taxed at federal capital gains tax rate max. 15% • Net federal tax savings to shareholders on commission deduction vs. dividend income (35% vs. 15%) yields 20% • Annual deferral of federal income tax on up to $10,000,000 qualified gross receipts • Potential for state and local tax savings • Potential Estate & Gift Planning opportunities

6. Example of Tax Savings

7. Operating the IC-DISC • Export Sales made by Supplier to its customers, DISC is not involved • IC-DISC is transparent to Customers • IC-DISC earns commission on qualified export sales • IC-DISC distributes commission income earned to shareholders via a qualified dividend or possibly loaned back to Supplier • IC-DISC shareholders pay federal tax at capital gains rate maximum rate 15% (currently for 2011 and 2012) • Dividend not paid subjects deferred income to interest charge, currently .0034 of tax on deferred income • Tax return is filed on or before 15th day of ninth month following year end

8. IC-DISC Owned Directly by Flow Through Entity Individuals Non-US Related Customer Business Profits & Dividends taxed to Shareholders 100% Exports Sales S Corporation Non-US Customer 100% Dividend Commission IC-DISC

9. Ownership Directly by Individuals Individual A Individual B Individual A Individual B Profits net of Commissions Dividends Exporter Supplier USCo IC-DISC USCo Commission Sales Non-US Customer Non-US Related Customer

10. Basics • Have same tax year as primary shareholder • Maintain its own set of books and records • Have its own Bank Account • Bank account minimum balance $2,500 • Export sales prior to incorporation, capitalization and election to be treated as an IC-DISC do not qualify for IC-DISC benefit • Hold Board of Directors and Shareholder meeting in state of incorporation (e.g. adopt corporate resolutions to declare dividends or possibly to loan cash back to Supplier)

11. Computation of Interest Charge

12. General Federal Tax

13. Federal Taxes • State of uncertainty • Need to address deficit and high unemployment • Questionable if any significant tax legislation will pass before the 2012 election • Obama’s September 8th,2011 address to joint session of Congress –White House Jobs package sent to Congress September 12, 2011

14. Expiring Tax Credits - December 31, 2011 • Research - 20% of qualified research expenditures • Work Opportunity (WOTC) • Up to 40% of 1st year wages up to $6k per employee, $12k qualified veterans, and $3k qualified summer youth employees. Where employee is a long-term family assistance (LTFA) recipient, WOTC is a percentage of 1st and 2nd year wages, up to $10k per employee. • Differential Wage Payment for Employers • Eligible small business employers that pay differential wages (payments to employees for periods that they arecalled to active duty, uniformed services, more than 30 days)

15. Tax Considerations for Manufacturers • Research and Development Tax Credit • Inventory valuation • UNICAP – Uniform Capitalization of Costs • Domestic Production Activities Deduction • Depreciation • Cost Segregation Study • Multi-state tax issues • Nexus • Sales & Use taxes

16. Questions?

17. IRS Circular 230 Disclosure As a result of perceived abuses, the Treasury has recently promulgated Regulations for practice before the IRS. These Circular 230 regulations require all accountants to provide extensive disclosure when providing certain written tax communications to clients.  In order to comply with our obligations under these Regulations, we would like to inform you that any advice given in this presentation, including any attachments, cannot be used to avoid penalties which the IRS might impose, because we have not included all of the information required by Circular 230, nor have we performed services that rise to this level of assurance.

18. Thank You! Kevin Heyde, CPA Kevin.Heyde@mcmcpa.com 888.587.1719 www.mcmcpa.com