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Tag Archive for IC DISC

The Cares Act And IC-DISC

Brian Schwam: The cares Act And IC-DISC

Congress sent the Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’ to the President, who signed it into law.

There are three significant provisions that impact 2018, 2019, and 2020 income taxes and your use of the IC-DISC.

Net operating loss carrybacks. The provisions enacted as part of the Tax Cuts and Jobs Act at the end of 2017 eliminated the ability to carry back net operating losses to obtain tax refunds. The CARES Act provides for a five-year net operating loss carryback for losses generated in years beginning after December 31, 2017 and before January 1, 2021.

Section 461(l) delayed effective date. Section 461(l) limits the deductibility of losses for taxpayers other than corporations. The provisions, enacted as part of the Tax Cuts and Jobs Act at the end of 2017 limited the current deductibility of these losses to $500,000 for married filing jointly taxpayers ($250,000 for all others). The CARES Act delays the impact of this provision until taxable years beginning after 2020 for most taxpayers, however the provision was completely eliminated for excess farm losses.

Section 163(j) interest limitation. The provisions, enacted as part of the Tax Cuts and Jobs Act at the end of 2017, limited the deductibility of interest to 30 percent of modified taxable income. The CARES Act modifies this provision for tax years beginning in 2019 and 2020 and allows for the deductibility of interest to 50 percent of modified taxable income.
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The CARES Act And The IC-DISC

Brian Schwan-CARES ACT and IC-DISC

Congress sent the Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’ to the President, who signed it into law.
There are three significant provisions that impact 2018, 2019, and 2020 income taxes and your use of the IC-DISC.

Net Operating Loss Carrybacks
The provisions enacted as part of the Tax Cuts and Jobs Act at the end of 2017 eliminated the ability to carry back net operating losses to obtain tax refunds. The CARES Act provides for a five-year net operating loss carryback for losses generated in years beginning after December 31, 2017 and before January 1, 2021.

Section 461(l) Delayed Effective Date
Section 461(l) limits the deductibility of losses for taxpayers other than corporations. The provisions, enacted as part of the Tax Cuts and Jobs Act at the end of 2017 limited the current deductibility of these losses to $500,000 for married filing jointly taxpayers ($250,000 for all others). The CARES Act delays the impact of this provision until taxable years beginning after 2020 for most taxpayers, however the provision was completely eliminated for excess farm losses.

Section 163(j) Interest Limitation
The provisions, enacted as part of the Tax Cuts and Jobs Act at the end of 2017, limited the deductibility of interest to 30 percent of modified taxable income. The CARES Act modifies this provision for tax years beginning in 2019 and 2020 and allows for the deductibility of interest to 50 percent of modified taxable income.
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Watch How An IC-DISC Can Benefit Companies With Export Income

Closely held companies that export have a tax-savings opportunity by creating an Interest Charge–Domestic International Sales Corporation (IC-DISC).

The IC-DISC is a creature of the Internal Revenue Code that provides a significant tax incentive for business owners who manufacture and export. Small to mid-size businesses can set up a separate corporation that elects to be treated as an IC-DISC.

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Connect With Doug Eckert.

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IRS: Only 25% of Potential IC-DISC Tax Benefits Being Captured

Closely-held companies that export have a tax-savings opportunity by creating an Interest Charge – Domestic International Sales Corporation (IC-DISC). While about 6,000 small and medium businesses take advantage of the tax incentives of an IC-DISC, the IRS statistics suggest that only about 25 percent of the potential IC-DISC benefits that are available are actually being captured.

Understanding IC-DISCs

The IC-DISC is a creature of the Internal Revenue Code that provides a significant tax incentive for business owners who manufacture and export. Small to mid-size businesses can set up a separate corporation that elects to be treated as an IC-DISC. Businesses can allocate approximately half of the profits from export sales to this entity. Read more

The Export Disc Corporation (IC-DISC): Computer Software And Internet Sales And Licenses – Part 7

Partial Transfer of a Copyright Article: A Lease

If less than all of the benefits and burdens associated with a copyrighted article have passed to the transferee, the Software Regulations treat the transaction as a lease. Copyright articles can be leased as well as sold. Computer programs do not involve the risk of physical deterioration or physical destruction but they do have the risk of technological obsolescence. If this risk is assumed by the transferee, generally through a transaction in which the transferee makes a single payment in return for the right to use the program copy in perpetuity, then the transferee has assumed the risk of obsolescence and should be treated as the owner of the program copy. Read more

The Export Disc Corporation (IC-DISC): Computer Software And Internet Sales And Licenses – Part 6

Application of the Title Passage Rule

As described in Part 5, the source of income generated by the sale or exchange of a copyrighted article often depends upon whether the sale took place within or without the United States. The place of sale is determined under the title passage rule. The Software Regulations recognizes that typical license agreements do not refer to a transfer of property and an electronic transfer is generally not accompanied by the usual indicia of the transfer of title.

There are important categories of copyrighted article transfers for DISC purposes: (i) a transfer of tangible property, such as a tangible medium in which the copyrighted article Read more

The Export Disc Corporation (IC-DISC): Computer Software And Internet Sales And Licenses – Part 4

The Source of Income Analysis

Once it is determined that a computer program is a copyright article and thus “export property” for DISC purposes; then the issue is to determine whether the Software Program is being sold for use, consumption of disposition outside of the U.S. This analysis depends upon the “source of income” rules.

Generally under the current rules, the source of income from sales of property depends to varying extents upon both the type of property and whether the property sold or leased is “inventory property”.

Income from the lease of a copyright article must also fit this definition of non U.S. source Read more

Export Disc Corporation (IC-DISC): Computer Software And Internet Sales And Licenses – Part 3

Copyright Rights

The regulations distinguish between transfers of copyright rights and transfers of copyrighted articles based on the type of rights transferred to the transferee. The transfer is classified as a transfer of a copyright if, as a result of a transaction, a person acquires any one or more of the following rights:

1. the right to make copies of the computer program for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending;
2. the right to prepare derivative computer programs based on the copyrighted computer program; Read more

The Export Disc Corporation (IC-DISC): Computer Software And Internet Sales And Licenses – Part 2

The Export Property Analysis

Export property is defined to mean, in general, property that is:

1. Manufactured, produced, grown or extracted in the United States by a person other than a DISC,

2. Held primarily for sale, lease, or rental, in the ordinary course of trade or business, by, or to, a DISC, for direct use, consumption, or disposition outside the United States and

3. Not more than 50 percent of the fair market value of which is attributable to articles imported into the United States. Read more

The Export Disc Corporation (IC-DISC): Computer Software And Internet Sales And Licenses – Part 1

The Interest Charge Domestic International Sales Corporation

The IC-DISC has been approved as an acceptable tax planning entity for the export of American produced computer software and programs as early as 1985.  In 1998, a very detailed set of Treasury Regulations were issued that have added certainty to this area of the law.

For purposes of determining the applicability of the DISC to computer software exports, two key analyses are often required.  First, (1) is the software “export property” for DISC purposes and (2) is the software product’s source of income “from without the U.S.”?  Is the product for use, consumption or sale without the U.S.? Read more