By Thomas L. Vermeulen, C.P.A

I’ll bet you never considered your farming operation to be an international business.  However, the U.S. government thinks that you just may be trading internationally… and that is a good thing!  If current production and crop prices continue, it may be well worth your effort to establish a corporation, and make an IC DISC election in time for the 2014 crop year harvest.  I have estimated that potential tax savings will range between 4 and 6 cents per pound for almond growers using this structure.

The IC-DISC is the singular remaining export incentive.  Others have been eliminated due to complaints by the World Trade Organization.  Further, the IC-DISC currently enjoys bi-partisan support within U.S. congress.  President Obama had originally targeted this incentive for elimination, however, that changed with the “Great Recession”.  Congress has turned its focus to U.S. jobs creation and has backed this incentive for internationally outbound transactions.  It is important to emphasize that the farming operation must remain profitable to realize tax savings from the IC-DISC.

Blue Diamond Growers estimates that “70% of the industry’s sales are to foreign markets bringing new wealth to California and the nation as a whole”. Other exporters may have higher ratios of export sales.  The higher the export ratio, the greater benefit provided by the IC-DISC.

The IC-DISC benefit is essentially the difference between ordinary income rates and qualified dividend rates plus net investment income tax rates.  The result is a potential tax savings of 15.8% of amounts paid to an IC DISC.  To qualify as an IC-DISC, a domestic corporation must pass several tests known as the qualified export receipts test and the qualified export assets test.  Your handler/broker will provide substantiation of the ratio of export sales each year.

The IC-DISK is a “paper” entity used as a tax savings vehicle.  It does not require many of the typical corporate formalities such as an office, employees, or tangible fixed assets.  It simply serves as a conduit for export tax savings.  Shareholders within an IC-DISC can be other corporations, individuals, partnerships, trusts, estates, or a combination thereof.  This adds flexibility to the types of entities that may benefit from this structure.

The way the IC-DISC works can be summarized as follows:

  • The owner-managed exporting company (The Farmer) forms a special U.S. corporation that elects to be an IC-DISC.
  • The Farmer pays a commission to the IC-DISC.
  • The Farmer deducts the commission from ordinary income – at tax rates between 28% and 39.6%.
  • The IC-DISC pays no tax on the commission income.
  • Shareholders (Also The Farmer) of the IC-DISC are not taxed until earnings are distributed as dividends.  However, shareholders must pay annual interest on any tax deferred.
  • The results may save taxes ranging from 4.2% to 19.6%, depending on your Federal tax bracket.  The higher Federal tax rates, the greater the savings.

There are other tax benefits that may result from the IC-DISC.  There are also several requirements and qualifications that must be met by the IC-DISC.  These are beyond the scope of this article.

The tax benefits of an IC-DISC begin once you have formed the corporation and made the election.  I recommend that you look into the potential for tax savings at your earliest opportunity before the 2014 crop year harvest.

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