DISC Offers Tax Advantages for Georgia
Exporters
By Yelena Epova, CPA and Robert
Verzi, CPA
As recently reported in GlobalAltanta.com, Georgia
exporters are a bright spot in an otherwise unfavorable economic
landscape. There is additional good news for Georgia exporters-an
overlooked export tax incentive is available which can reduce
federal and state income tax on such exports by 50 to 100
percent!
Specifically, if your business has either type of transaction
listed below, you can convert ordinary income (taxed at about 34 or
35%) to capital gain income taxed at 15%. The following types of
income qualify for this special tax benefit:
1. Exported property which is manufactured in the United States
and used outside the US or,
2. Engineering or architectural services rendered for projects
located (or proposed for location) outside the United States.
To take advantage of this tax incentive, you will have to form a
U.S. corporation and elect for it to be treated as a domestic
international sales corporation (or DISC). The DISC is essentially
a paper company and needs very little substance. Its taxable income
is computed using special pricing rules, but it does not pay U.S.
income tax. A DISC can earn income in an amount equal to the
greater of:
- 50% of the taxable income of your export sales; or
- 4% of the gross receipts on the export sales.
The amount determined under the 4% method cannot exceed the
total amount of taxable income derived from export sales. The
income earned by the DISC would be subject to the 15% income tax
when distributed to its shareholders.
Here's how it works:
- Company XYZ forms a DISC. Company XYZ has $3,000,000 of export
sales.
- Assume that the cost of goods sold relating to these sales is
$1,500,000 and other expenses are $500,000, leaving a net export
profit of $1,000,000.
XYZ Corporation would use the 50% method (described above)
since this alternative would generate the most tax benefit.
Therefore, $500,000 (50% of $1,000,000) would be subject to tax at
15% instead of the corporate rate of 34% (if XYZ was a C
corporation) or 35% if XYZ were and S corporation (assuming the
shareholder is in the top marginal individual tax rate). Assuming
the later, XYZ Corporation and its shareholders would save $100,000
($500,000 * (35% ‐ 15%)) in federal income tax per year. In
addition, state income taxes can be saved by using the DISC
structure. The savings is unlimited. The more your business
exports, the more the potential tax savings.
Taxpayers can take advantage of these substantial savings only
after they form a U.S. corporation and make an election to treat
the company as a DISC.
Please feel free to contact Yelena Epova or Robert Verzi,
International Tax Partners with Habif, Arogeti and Wynne, if you'd
like to discuss this tax savings opportunity.
About the authors:
Yelena Epova leads HA&W's international services group.
She specializes in advising domestic and international companies on
international tax issues and tax planning strategies regarding
inbound and outbound operations.
Robert Verzi is an international tax partner with
HA&W. He has more than 25 years of experience providing
international tax solutions to publicly and privately held
corporations on an array of international tax matters, such as
foreign tax credit management and utilization, structuring foreign
and domestic operations, international mergers and acquisitions,
and export tax incentives.