U.S. Tax, International Tax, and Health Care Consulting and Compliance Experts
Foreign Tax Credit ("FTC")
U.S. Corporations and individuals, other than U.S. Partnerships, are generally taxed on their worldwide income. In order to
significantly alleviate the double taxation that results when a foreign country also subjects a U.S. company or individual to a
type of income tax, typically territorial tax, the United States generally allows a credit (foreign tax credit or "FTC") for foreign
income taxes paid or accrued. However, the U.S. does not treat all types of income the same and there are specific
regulations that help determine how both income and expenses must be calculated in determining the FTC. Strategic FTC
planning can play an important role in minimizing the global tax burden and create a competitive advantage to U.S. companies.
Additionally, FTC planning should also be considered with other important tax initiatives, such as extraterritorial income
exclusion deductions and domestic production activity deduction. Taxpayers may optimize one of these two deductions at the
expense of the foreign tax credit. We can work with your organization to maximize the FTC while preserving all available
deductions. Please contact us to schedule a free consultation.
Interest Charged - Domestic International Sales Corporation ("IC-DISC")
With the recent repeal of ETI some exporters will realize an increase in their U.S. effective tax rate. However, there is good
news for small and midsized companies. Owner-managed exporting businesses can recoup, or even exceed, their tax savings
by creating an interest charge-domestic international sales corporation ("IC-DISC"). The IC-DISC is not a tax shelter. The IC-
DISC provides a permanent 20 percent tax savings for qualifying U.S. exporters. It also has a number of sophisticated features
that can be tailored to help businesses meet objectives and goals.
The IC-DISC is a tax-exempt “paper” entity utilized as a tax-savings vehicle. It does not require corporate substance or form,
ofﬁce space, employees or tangible assets. It simply serves as a conduit for export tax savings. Commissions, as determined
by tax law, are paid by taxpayers to the IC-DISC. Commissions paid to the IC-DISC are not subject to the 35 percent U.S. tax
rate. Since the IC-DISC is tax exempt, tax is paid only on distributions to shareholders. Individual and pass-through company
shareholders pay income tax on dividends at the capital gains rate of 15 percent. The net effect is the elimination of double
taxation and a reduced corporate tax rate on the commission of 20%.
An important feature of the IC-DISC is that shareholders can be corporations, individuals or a combination of these. The
advantages of forming and IC-DISC are:
- Permanent tax savings on global sales
- Increased liquidity for shareholder of the business
- Ability to leverage the cost of capital
- Opportunities to create management incentives
- Means to facilitate succession or estate planning
Since the commission is determined based on calculations provided in the tax code maximum savings can be utilized by
maximizing the allowable commission to the IC-DISC. We have a strong history of maximizing these types of commissions and
can help you with the formation and maximization of this benefit. If you'd like more information please contact us to schedule a
Allocation and Apportionment of Expenses
The determination of allowable expenses is the cornerstone in the determination and maximizing a variety of favorable tax
- The Domestic Production Activity Deduction
- The Foreign Tax Credit
- Extraterritorial Income Exclusion
- Interest Charged - Domestic International Sales Corporation
Expense allocations covered under Internal Revenue Code §861-8 include special rules for research and development
expenses, interest expense, selling and general administrative expenses. If §861-8 principles are not followed correctly
taxpayers could improperly determine a credit or deduction and potential expose their company to tax under payments, interest
and penalties. Conversely, taxpayers may over allocate or apportion expense to favorable activity and thus over pay taxes or
limit the credits and deductions available to the company. A solid and thorough understanding of these rules can lead to
maximum tax savings. We understand these rules and have consulted with numerous Fortune 500 companies on the proper
treatment of expenses. If you'd like more information please contact us to schedule a free consultation.
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