Exporters of U.S. made goods can use an IC-DISC to reduce their U.S. tax by 10% or more of their profits on those goods. This export tax benefit is available only if the goods are at least partly manufactured in the U.S. and have at least 50% U.S. content. Both manufacturers and distributors of the goods can get the tax subsidy for exports.
If the goods you export did not fully originate in the U.S., you may still qualify. Example: Fred’s Copiers LLC in San Diego buys used Japanese made copiers and printers, refurbishes them, and sells them to customers in Southern California and Mexico. In most cases, Fred’s must replace one or more rollers, and usually some plastic parts. The work is done by skilled workers using hand and power tools. A typical copier costs Fred’s $200 for the old copier, $51 for parts purchased locally, and two hours of labor, and sells for $500. The copiers sold to customers in Tijuana probably qualify.
IC-DISC rules require that the goods be partly manufactured in the U.S. Fred’s is doing activities that may be considered manufacturing under U.S. law. In Bausch and Lomb, 71 TCM 2031 (1996), the U.S. Tax Court held that assembling sunglasses was manufacturing. The Court found that the skill needed to efficiently assemble the sunglasses indicated that the activities were manufacturing. It contrasted this to its ruling in Garnac Grain Co., 91 TC 131 (1988), where the Court held that grain storage and drying was not manufacturing. In that case, the Court found that the activities were not considered manufacturing by the industry.
Whether an activity is manufacturing or not depends on the facts. If trained labor is a key part of the process, multiple parts or components are required, and there are multiple steps involved, then the activity likely is manufacturing. See the Tax Court’s ruling in Dave Fischbein Manufacturing Co. v. Commissioner, 59 TC 338 (1972), which involved assembly of parts.
Goods must also have 50% U.S. content. IRS regulations specify that U.S. content is the total sales price less the value of the foreign content. The value of foreign content is the value of imported articles as of the time such articles are imported into the U.S. The regulations state that this value is their full dutiable value for customs purposes, whether or not duties apply. Generally, this means the value exclusive of shipping and insurance at the “first sale” of the goods. For example, if a Hong Kong manufacturer sells the a part to a wholesaler, who then sells it to a customer, the first sale price is the price the Hong Kong manufacturer gets. For Fred’s, the foreign value is the $200 old copier plus part but not all of the $51 for parts. Thus, the foreign content of the copier sold by Fred’s is clearly less than $250, and it meets the U.S. content requirements.
IRS rules allow Fred’s to determine if the copiers qualify either on a sale by sale basis, or by grouping multiple sales. Several grouping options are available, and choice of the option to use depends on the particular business. Grouping can also improve the results of IC-DISC calculations.
Both manufacturers and distributors can get IC-DISC tax benefits. If Fred’s sells the copiers to Jimmy’s Office Warehouse, who sells them to Tijuana customers, both Fred’s and Jimmy’s can get DISC benefits. Fred’s should ask Jimmy’s how many copiers they sold for use outside the U.S., and let Jimmy’s know that the copiers qualify for the IC-DISC tax break.
Determining what qualifies for the IC-DISC export tax subsidy can be complex. Setting up an IC-DISC in a way that maximizes the tax benefit can also be complex. Get the personal attention and experienced IC-DISC help you need to save taxes. Call Steve Fox today. It’s your business, get personal.