How designers of energy-efficient buildings can get tax benefits normally earmarked for the investor.

By Dhaval R. Jadav, David Ji, and Jim Young

As many architects, engineers, and design-build contractors today struggle with the worst economic downturn since the Great Depression, they may be overlooking a significant source of cash that can help them hire additional employees, more competitively price their jobs, and expand their business: the Energy Efficient Commercial Buildings Deduction. This relatively new tax incentive remains underutilized because many taxpayers do not know it exists or how it works.

According to the U.S. Energy Information Administration, the building sector consumes nearly 50% of all energy and nearly 75% of all electricity produced in the country! All indicators suggest that this trend is likely to get worse. Between 2010 and 2030, total building sector energy consumption is predicted to increase by about 7 quadrillion Btu. To give you a point of reference, 1 quadrillion Btu is the energy equivalent to 36 million tons of coal being burned at a power plant.

In order to counter these and other problems that we’re facing in energy, Congress passed the Energy Policy Act of 2005.

That bill created, among other things, the Energy Efficient Commercial Buildings Deduction found in section 179D of the Internal Revenue Code. In a nutshell, the deduction allows for an immediate depreciation deduction of up to $1.80 per square foot for commercial buildings that achieve certain reductions in total energy and power costs with respect to their interior lighting, HVAC and hot water, and building envelope systems.

So who gets the benefit? Well normally, it’s whoever pays the cost of putting the energy efficient property into service. This would be the owner or landlord of the building. But in addition, DESIGNERS OF GOVERNMENT-OWNED BUILDINGS can also get the benefit! So if you’re an architect or engineer who has done design work or is doing design work for new government buildings or renovations/retrofits of existing government buildings, i.e. schools, state universities, libraries, town halls, airports, transportation facilities, post offices, court houses, military bases, offices, etc., this incentive can be yours! In fact, this is the only green building incentive targeted towards designers!

There are multiple ways to qualify for a 179D deduction, and the amount of the deduction depends on the energy efficiency levels that your project meets. In order to qualify for the full deduction, your design must reduce the total annual energy and power costs related to lighting, HVAC, and building envelope by 50% or more compared to the minimum requirements established in ASHRAE standard 90.1-2001. If you can’t meet this whole deduction threshold, all is not lost.

Partial deductions are available for partially qualifying buildings and reductions of as little as 10% in some cases can result in a deduction of up to 60 cents per square foot. For interior lighting, there’s even another way that you can get a fractional benefit of 30 cents to 60 cents per square foot depending on reductions in lighting power density.

The full deduction is very difficult to get and typically requires proactive design with the 179D deduction in mind. But you shouldn’t stop there. It’s much easier to obtain partial qualification or fractional qualification. In fact, with most states today adopting codes stricter than 2004 standards, there’s a good chance that if you’re dealing with a new construction or major retrofit, you WILL qualify under one of the partial qualification methods. These partial deductions can result in very significant tax benefits, so don’t leave this money on the table.

One example of this is a group of four California Department of General Services Buildings which undertook recent major retrofits. The architect on record did not feel that their design would qualify for a 179D deduction. Although the buildings did not qualify for a full deduction, we were able to help the architect secure a $718,000 deduction worth an estimated $251,000 in net tax savings through one of the partial qualification methods with respect to interior lighting. Too often, architects and engineers forego this benefit due to a lack of understanding about the various ways in which their projects may qualify.  Think about what you could accomplish with an extra $250,000 of found money!

Another example is a student housing building for a state university in Louisiana. The building was about 92,000 square feet in size. In this case, the architect was able to claim a $110,000 deduction that resulted in an estimated net tax savings of $38,700. 2 systems qualified on this project – the lighting and the HVAC system. The lighting consisted of 2 tubes 4’ super T-8s throughout, while the HVAC was an efficient variable air volume system.

These two examples illustrate how architects, engineers, and design-build contractors are able to take advantage of this important energy tax incentive program. While the process is somewhat complex, it essentially begins with a careful tax and energy modeling analysis and ends with certification and the filing of amended returns. It can also result in a brand new source of valuable funds in these trying economic times.

The U.S. Congress and many state governments realize how critical energy efficiency is to the future of our economy. A collective reduction in national consumption of energy protects us from recurrent energy-related problems caused by tight energy supplies and rising import dependence. They also know that companies designing energy efficient systems and/or putting into place energy efficient property are supporting millions of high skilled, well-paying jobs.

For these and other reasons, the effort by Congress and recent administrations to foster energy efficiency and the adoption of renewable energy sources is a trend that is here to stay. In fact, the Department of Energy and IRS are working together through the Better Buildings Initiative to develop a proposal for expanding and extending the 179D deduction, so this incentive is likely to become even more powerful in the future.

The time to act is now! If you have worked on any public property in the past few years, you need to consider a 179D analysis. And act quickly, because this deduction is claimed on amended tax returns which are only typically open until three years after the date of original filing. Don’t let the statute of limitations run on you for older projects that are already completed! Also for current projects, there may be multiple designers who are eligible for the deduction so being first to act can be the difference in being able to secure a deduction versus being left out in the cold.

For more information on 179D, please visit alliantgroup at www.alliantgroup.com

alliantgroup’s Dean Zerbe quoted in Reuters – Higher Taxes And Epic Tax Fight Are On The Horizon

By Kevin Drawbaugh | Thu Aug 4, 2011 4:14pm EDT

WASHINGTON (Reuters) – U.S. tax code changes on matters ranging from corporate jet depreciation to yacht and beachhome deductions will be in play once a congressional super committee to reduce the deficit gets down to work.

A comprehensive tax reform package is unlikely to emerge from the panel in the next four months, aides and analysts said on Thursday, citing the divisive power of 2012 election politics and the lack of adequate time for such a project.

“The possibility of real tax reform is about zero. There is just too much Tea Party and Republican opposition,” said one Democratic Senate aide as party leaders considered a short list of contenders for inclusion on the 12-member panel.

Still, the committee is sure to examine tax breaks for ethanol, the oil and gas business, employer-provided health insurance, domestic manufacturers, research and development, and high-rolling managers of private equity and hedge funds.

Offshore corporate profits issues — such as overseas income deferral — will come under scrutiny as well, but perhaps end up being too complex to confront by November 23, when the panel must finish its work, analysts said.

“We don’t want to see it become a taxhiking exercise,” said a Republican Senate aide.

Lurking in the background will be an intensive lobbying effort by high-tech and pharmaceutical firms for a tax holiday that would let them bring home, or repatriate, at a discounted tax rate, an estimated $1 trillion in offshore profits.

Another business lobbying push — for lowering the 35-percent corporate income tax rate, possibly in exchange for acquiescing to loophole closures — will come up, but also probably be too big a bite for the panel, analysts said.

“There is an interest in tax reform, but the idea that it will happen between now and November is to live in a fantasy land,” said Dean Zerbe, a former senior Senate tax staffer and now managing director at tax consultancy alliantgroup.

Zerbe said the super committee would not take on taxes at all. “You’ll see the Republicans close ranks. They didn’t go through all this in the first round just to give it away in the second round. I don’t see this as a window for tax reform.”

At the same time, Republicans may be willing to give ground on a few, largely symbolic loophole closures, said Ed Mills, also a former Senate tax staffer and now a policy analyst at investment firm FBR Capital Markets.

“It is ‘Deadlock Part 2’ on a grand bargain,” Mills said, but he added that with elections nearing, Republicans will be reluctant to defend accelerated depreciation for corporate jets or the mortgage deduction for yachts and vacation homes.

The super committee is tasked with finding $1.5 trillion in budget savings over 10 years. That is above and beyond the savings of $917 billion in 10 years that was included in the debt ceiling bill made law this week after months of debate.

When the committee finishes its work on November 23, Congress will have until December 23 to vote on the panel’s recommendations.

If either deadline goes unmet, automatic spending cuts of $1.2 trillion over 10 years will be triggered on January 1, 2013 — after the November 2012 elections.

TRIGGERS ‘ONEROUS’

“The triggers are onerous enough for members” to try hard to hit their $1.5-trillion savings target, Mills said.

That can happen without sweeping reforms if committee members cobble together some loophole closures, some budget cuts and small revenue raisers such as a broadcasting spectrum auction or higher mortgage guarantee fees, he said.

Beyond December 23, the immediate focus will shift to the end-2011 expiration of a temporary, 2-percent Social Security tax cut; “bonus” depreciation that allows businesses to write off 100-percent of certain new capital investments; and the so-called “patch” that raises the exemption level on the alternative minimum tax (AMT) so that more than 20 million middle-income households do not have to pay it.

Election-year politics will take over as 2012 unfolds, with Republicans standing firm on a “no new taxes” pledge and Democrats defending the Medicare and Medicaid health programs, as well as the Social Security retirement pension program.

Both positions are shaping up to be foundations of the parties’ election campaigns and would be undermined if the super committee were to defy the odds — and the calendar — by crafting comprehensive tax or entitlement reform.

Further ahead, shortly after the 2012 elections, the 2001 and 2003 Bush tax cuts will be due to expire again, with implications for many tax provisions, among them:

* income tax rates, personal exemption, deduction limits;
* estate tax, marriage penalty, child tax credit, student loan interest deduction, earned income credit; and
* capital gains and dividend taxes.

Expectations about how these will be handled will influence the discussion in coming weeks as well.

For a more in-depth look into alliantgroup, please visit www.alliantgroup.com

State & Local Tax Alert: Changes to Utah Research & Development Tax Credit Mean Greater Benefits for Utah Businesses

The Utah Research & Development Tax Credit, Utah Code Ann. § 59-7-612, underwent a major revision as a result of Senate Bill No. 223 and House Bill No. 52, both effective January 1, 2008. The changes allow taxpayers to choose between a flat credit for 5% of their qualified research expenses, 6.3% for taxable years beginning on or after January 1, 2009 and 9.2% for taxable years beginning on or after January 1, 2010, and an incremental credit for 5% of their qualified research expenditures that exceed the base amount. These credits provide significant benefit to companies who have experienced base amount limitations in the past or have had difficulty utilizing their credits.

Under the Old Law

• Taxpayers claiming a Utah R&D credit were entitled to 6% of the taxpayer’s qualified research expenses for the previous taxable year that exceeded the base amount.
• This credit could only be claimed in the taxable year immediately following the year for which the corporation qualified for the credit.

Under the New Law

• Taxpayers claiming a Utah R&D credit are entitled to 5% of the taxpayer’s qualified research expenses for the current taxable year that exceed the base amount.
• Alternatively, taxpayers may now claim 5% of all current year qualified research expenses for taxable years beginning after January 1, 2008. The credit increases to 6.3% for taxable years beginning on or after January 1, 2009 and 9.2% for taxable years beginning on or after January 1, 2010.

How alliantgroup Can Help You Take Advantage of the Utah R&D Tax Credit

alliantgroup’s professional staff is always up-to-date on new regulations that could provide you with additional revenue and/or tax reduction. The R&D Tax Credit provides, among other things, a hidden and immediate source of cash for many companies as well as a significant reduction to current and future years’ state tax liabilities. Our team of specialists in state R&D tax credits consists of attorneys, accountants, engineers, software developers, biologists, chemists, and others who have the experience and the technical capability to identify and maximize the R&D tax credits available to your business.

For more information
contact: Brad Mols, Regional Managing Director
818.596.1500 office
310.709.2817 mobile
888.878.3093 fax
brad.mols@alliantgroup.com

Finally Some Good Tax News For Business

By Dean Zerbe
Washington. D.C., (August 11, 2009)

The daily headlines are chock-full of stories about Congress and the administration finding new ways to raise taxes on small and medium businesses and increase the work of CPAs. While the outlook for the economy and taxes is more black and grey than blue skies, I wanted to bring to your attention some very good news potentially on the horizon: legislation that has been recently introduced by Senator Grassley, Ranking Member of the Senate Finance Committee – S. 1381, the Small Business Tax Relief Act of 2009.

Key provisions of S. 1381 include the following:

– Expand Section 179 to $500,000

– Expand the number of C Corporations that pay the lowest rate

– General business credits would no longer be limited by the individual AMT

– A five-year carryback for general business credits

– Net operating loss carryback for five years

– Section 199 Domestic Production Deduction – 20% for flow-through businesses

 The details of the legislation can be found here:

http://cts.vresp.com/c/?alliantgroupLP/224a14977d/TEST/df384387ef

Quite frankly, this is the most pro-small and medium business tax legislation I have seen in recent memory, and certainly the only one that has a chance to become law. alliantgroup and its partners were a crucial voice in shaping this important legislation. It was at alliantgroup’s Midwest Tax Conference that Senator Grassley heard first-hand from alliantgroup and its partner CPA firms and business clients about several issues that were ultimately included in S. 1381. For example, the benefits of removing the AMT limitation on general business credits was first brought directly to the attention of Senator Grassley and the Finance Committee tax staff at the Midwest Tax Conference and is now included in the legislation.

While this legislation isn’t moving tomorrow, it sets an important marker as Congress goes forward, particularly if there is going to be another stimulus bill or as a means of offsetting somewhat the increased costs to business of health care. Senator Grassley is a leader on tax issues in Congress and has a history of working on a bipartisan basis with his Democratic counterpart Senator Baucus.

However, the chances of S. 1381 becoming law will certainly be improved if CPAs and the business community make known their support of S. 1381 to elected officials. It would be a tremendous help to efforts to get S. 1381 enacted if business owners and accountants were to send a quick note or email to their elected officials – Senators and Members of Congress – stating their support for S. 1381: the Small Business Tax Relief Act of 2009. The note or email could be brief, stating support for the bill, including a line or two on how it will benefit them or their clients, and asking them to cosponsor the bill.

Having worked in Congress for nearly twenty years – seven of them on the Senate Finance Committee as tax counsel – I can assure you that a personal statement in support of this legislation can have a strong positive impact.

One last comment. While alliantgroup’s core mission is to assist businesses in reducing their tax burdens by qualifying for federal and state tax incentives, we see as part of that mission serving as a voice for small and medium businesses and our partner CPA firms in Washington, D.C. One of the key reasons I joined alliantgroup was that I saw first-hand that policy makers and the press were rarely being provided knowledgeable information about the impact of tax legislation on small and medium businesses and CPA firms. It is one thing to talk at 10,000 feet about the tax rates – many can do that in Washington – it is a whole different game to explain in detail the impact of tax legislation to policy makers and the press.

That working knowledge of the tax laws comes not just from me, but the entire alliantgroup team and equally from you all. I have learned enormously from meeting and talking (and yes emailing) with alliantgroup’s CPA partners and business clients. I welcome and greatly appreciate your comments regarding this legislation and all tax policy being discussed in Washington.

When the dust settles here in a few days, I will be writing to you about the outlook for taxes in the health care bill. But for now enjoy – and act on – this good news.

As a final note, I’d like to add that having former IRS commissioner Mark Everson join the alliantgroup team recently helps these efforts enormously. Mark is extremely well-respected by Congress and others involved in tax policy here in Washington.

If you would like to discuss this legislation or any other tax-related events in Washington, please email me at dean.zerbe@alliantgroup.com.

About Dean Zerbe:

When Dean Zerbe was Senior Counsel and Tax Counsel for the Senate Finance Committee, his job was to know how to get things done on The Hill, and he was intimately involved with almost every major piece of tax legislation that was signed into law during his tenure. Now, as National Managing Director for alliantgroup, Dean is the ultimate tax policy expert – and his job is to make sure our clients know how to take advantage of every tax incentive the government makes available 

About alliantgroup:

 alliantgroup is an independent specialty tax services firm that works with clients to ensure that they receive the full benefits of all available Federal and State government sponsored credit and incentive programs, such as the research and development tax credit, export tax incentives, manufacturing tax incentives, energy tax incentives, various enterprise zone incentives, sales and use tax refund reviews, and captive insurance companies. alliantgroup’s national headquarters are located in Houston, Texas with offices in Orange County (CA), Los Angeles, San Francisco, Chicago, New York, Boston, Miami, Washington D.C., Toledo (OH), Seattle, Atlanta, San Diego, and New Orleans.

alliantgroup, LP / 5400 Westheimer Court, Suite 700 / Houston, TX 77056  800.564.4540 / www.alliantgroup.com

IRS Commissioner Joins alliantgroup

The Honorable Mark W. Everson, who served as Commissioner of Internal Revenue from 2003 until 2007, has agreed to serve as Vice Chairman for alliantgroup, a leading provider of tax services to small, medium, and large businesses. In the role of Vice Chairman, Everson will advise alliantgroup on strategic, operational, and client service initiatives.

Mr. Everson made the following comments in response to today’s announcement:

“I am pleased to be joining alliantgroup, as they provide best-in-class tax services that assist small, medium, and large businesses in claiming incentives set forth by Congress to help American taxpayers. The cornerstone of alliantgroup’s services is its marriage of scientific & engineering expertise and knowledge of the tax code. This foundation allows alliantgroup to help companies meet their tax obligation while at the same time fully capturing incentives created by Congress.

“Many companies do not take advantage of all the tax incentives to which they are entitled. alliantgroup can help. Based on my meetings with alliantgroup personnel and a number of the accounting professionals with whom they work across the country, it is clear the firm has achieved a great deal since its founding and is well positioned for further expansion.”

According to Dhaval Jadav, alliantgroup CEO, “We are always looking for ways to make CPAs’ efforts on behalf of their clients more effective. So, I couldn’t be more pleased that Mark Everson has decided to join us. His service with the IRS and with the OMB gives him unmatched insight into building positive bridges between taxpayers, CPA firms, and the IRS. I know our clients will be delighted that they will be the ultimate beneficiaries of Mark’s experience and perspective.”

Dean Zerbe, former Tax Counsel and Senior Counsel to the Senate Finance Committee, who now serves as National Managing Director for alliantgroup, said, “Mark Everson was widely viewed by many in the Congress as the most effective and capable IRS Commissioner in a generation. Mark brought a renewed energy and commitment to the IRS and took to heart the need to balance service and enforcement. I was always impressed with Mark’s intelligence and insights, even when we were on opposite sides, and am very happy that we are now on the same team working to help alliantgroup’s CPA partners and business clients.”

Mark Everson’s joining alliantgroup as Vice Chairman is part of a strategy that also included bringing in Dean Zerbe in 2008 as National Managing Director of the firm’s Washington D.C. office. Dean’s prior experience working on the Senate Finance Committee, drafting legislation that helped businesses compete, will be complemented by Everson’s background and experience running the Internal Revenue Service.

According to Shane Frank, COO and co-founder of alliantgroup, “The combination of Zerbe’s legislative experience and Everson’s thorough knowledge of how the IRS works will provide alliantgroup with a depth of knowledge and level of skill and experience that is unparalleled in the industry.”

Prior to joining the IRS as Commissioner, Everson held Bush administration posts as Deputy Director for Management for the Office of Management and Budget (OMB) and Controller of the Office of Federal Financial Management. Everson also served in the Reagan administration, holding several positions at the United States Information Agency and the Department of Justice. In the private sector, Everson served as Group Vice President of Finance at SC International Services, Inc., a $2 billion food services company, and as an executive with the Pechiney Group, one of France’s largest industrial groups.

Mark W. Everson

Appellate Court Overturns District Court in U.S. v McFerrin

On June 9, 2009, the 5th Circuit Court of Appeals vacated the Texas Southern District Court’s ruling in U.S. v. McFerrin. The McFerrins had co-founded KMCO, Inc., a corporation located in Texas that manufactures commodity and specialty chemicals. They engaged alliantgroup, the nation’s leading provider of specialty tax services, to determine whether KMCO’s expenditures for research and development (R&D) were eligible for the R&D Tax Credit. alliantgroup conducted the study and established that KMCO had conducted activities that qualified for an R&D Tax Credit.

The Government challenged the McFerrin’s credit, and after a six-day trial, the District Court ruled in favor of the Government on the grounds that the taxpayer had failed to meet the threshold of innovation required by the “discovery test,” had failed to demonstrate that the taxpayer had conducted a process of experimentation, and had failed to substantiate its research credit.

In remanding today, the 5th Circuit found that the District Court erred by inappropriately applying the outdated “Discovery Test.” The 5th Circuit also found that the District Court, because it applied the wrong legal standard, failed to consider all relevant evidence to determine the McFerrin/KMCO’s eligibility for the R&D Credit. Finally, the Appellate Court made it absolutely clear that the “Cohan Doctrine” (if a qualified expense occurred, the court should estimate the allowable tax credit) is applicable to the R&D Credit and made clear that the court should “look to testimony and other evidence, including the institutional knowledge of employees, in determining a fair estimate” [citing Fudim].

In response to today’s decision, alliantgroup’s CEO, Dhaval Jadav, made the following statement:

“In a grey economy, the court’s decision today in McFerrin is a big ray of sunshine. Companies engaged in research and development should be greatly heartened by the court’s decision, which will make it significantly easier for companies to benefit from the R&D tax credit.”

In response to today’s decision, alliantgroup’s National Managing Director, Dean Zerbe (formerly Senior Counsel and Tax Counsel to the Senate Finance Committee 2001-2008 before joining alliantgroup) made the following statement:

“It is especially important that the court made it loud and clear to the IRS that the taxpayer has a right to rely on oral testimony and other evidence to support a claim for the R&D Credit. Equally important is that the decision directed that courts, where appropriate, should look to making estimates when determining the amount of the credit. As the leader in R&D studies, alliantgroup has found that many small and medium companies often do not have the level of paperwork and support documents as a Fortune 500 company. The court’s decision allowing estimates, oral testimony, and other evidence to support the claim for the R&D Credit will be particularly welcome to struggling small and medium businesses.

Shane T. Frank, COO of alliantgroup, made the following comment:

“With the economy where it is, this decision gives the IRS, business and tax service providers the opportunity to turn a new leaf and work together to ensure that companies are fully taking advantage of the R&D Tax Credit incentives, as is intended by Congress.”

Jeremy Fingeret of Fingeret, Frank and Jadav, lead counsel for the McFerrins, stated:

“As attorneys who represent hundreds of taxpayers claiming R&D tax credits, we are elated the 5th Circuit overturned this opinion. Not only did the Court strike down the Discovery Rule, but the 5th Circuit ordered the District Court to evaluate all evidence (including testimony) and make reasonable estimates for taxpayers claiming this valuable credit. It’s a well written opinion applicable for taxpayers big and small.”

“It is reassuring to know that alliantgroup is devoted to helping businesses claim government incentives like the R&D credit. Not only did they help us claim the R&D credit, but they stood behind their work product and defended us throughout the entire process.”  – Jeff McFerrin, Vice President, KMCO, inc.

For more information on this important case and what it will mean to taxpayers claiming the R&D Tax Credit, please contact: Steffanie Gunn at steff.gunn@alliantgroup.co.m

The IC-DISC Appears To Be Staying With Us

U.S. companies are finding it harder and harder to compete with companies around the globe. Many firms face an uphill climb as they are being out-produced, out-performed, and out-maneuvered by their foreign counterparts. For the savvy exporter, one solution that appears to be helping is something called the Interest Charge–Domestic International Sales Corporation (IC-DISC).

Congress has a history of providing tax breaks to U.S. companies that export U.S.-made products, and even certain services. These incentives have come and gone throughout the years, but the IC-DISC remains, and it is powerful enough to increase after-tax margin on exports by ten percent.

There has been speculation that the benefits available through the IC-DISC may be short-lived. Many have thought that the Obama administration would eliminate the ability to take IC-DISC dividends as qualified dividends. The White House, however, appears to have other ideas. Dean Zerbe, National Managing Director of alliantgroup, a national tax consulting firm, spent seven years as Tax Counsel on the Senate Finance Committee. He says, “While there are many ‘loophole closers’ present in the proposed budget released by the White House, the same budget is loud in its silence on the IC-DISC.” He goes on to explain: “The White House can read the tea leaves that a proposal to eliminate IC-DISC would be a political loser and would meet very real bipartisan opposition in the Senate.”

Others point to the imminent change in the ordinary income and qualified dividend tax rates, and particularly the spread between the two, on which IC-DISC benefits depend. The current rates are set to expire on December 31, 2010. Once again, Zerbe points to the Obama budget proposal, which would set qualified dividends at twenty percent, while raising the top ordinary income rate to 39.6 percent. Says Zerbe, the “IC-DISC will remain in place for the foreseeable future.”

This is excellent news for U.S. exporters, who face a struggling domestic economy and formidable international competition. But the clock is ticking. Unlike many incentives which may be captured on old returns, IC-DISC benefits are only available for transactions occurring after the IC-DISC is set up. “Companies must be proactive in all areas of their business,” says Jim Young, alliantgroup’s Export Practice Leader.

Young adds, “U.S. companies must educate themselves on the tax incentives available to them. For exporters, the IC-DISC is the only viable option left, but it is a tremendously powerful one.”

IC-DISC History and How it Works

The IC-DISC traces its heritage as far back as 1971, but until 2003, it did little more than provide a tax deferral opportunity. This benefit was well appreciated by the Fortune 1000, but it packed little punch for the small and middle-market. In 2003, the tide turned. Today, the IC-DISC allows U.S. companies to set up separate domestic entities which act as commission agents for the company’s export sales. Once the IC-DISC is set up, the U.S. company can pay commissions to the IC-DISC. These commissions can be as high as 50% of net export income or 4% of gross export receipts, whichever is higher!

There are three reasons why it is a good idea to pay a commission to the IC-DISC.

1. The commission is fully deductible.
2. The IC-DISC pays no federal income tax.
3. The IC-DISC is, at heart, a Subchapter C Corporation, meaning it distributes its income to its owners as a qualified dividend.

The result is a permanent reduction in tax of twenty cents on every commission dollar (taking the difference between the top ordinary income rate and the qualified dividend rate).

Jim Young and his team at alliantgroup work with companies across the United States to increase profitability through this government-sponsored tax incentive. “Often,” he says, “companies dismiss the IC-DISC as inapplicable, but many times they are wrong. The IC-DISC is actually much broader than most people realize. It covers the sale of products that are manufactured in the United States, but that doesn’t mean the taxpayer must be the manufacturer.”

“In the same vein,” Young continues,”if a manufacturer sells its product to another U.S. company, which in turn exports that product, the manufacturer can qualify just the same. Moreover, it is not only the export of tangible goods which qualifies; the provision of architectural and engineering services is incentivized by the IC-DISC as well. So if an engineering firm designs and builds a building in China, that engineering service would qualify for the IC-DISC.”

Don’t Try This At Home

On the surface, the rules governing the IC-DISC seem straightforward. In order to maximize the benefit, however, a firm that specializes in this complex structure needs to be engaged to manage the DISC structure on a monthly or quarterly basis.

alliantgroup’s CEO, Dhaval Jadav, tells of “one client who was claiming a $120,000 tax benefit via the IC-DISC structure that they self-implemented. When alliantgroup was brought in to review the company’s IC-DISC structure, we discovered that they should have been claiming $1.2 million in tax benefits as opposed to the $120,000 benefit they were claiming via self-implementation and self-calculation! Here is a situation where the company and its CPA firm thought they understood the rules and that they were maximizing the benefit of the IC-DISC structure. Unfortunately, nothing could have been further from the truth.”

Jim Young points out that alliantgroup sees situations like this on a weekly basis. “It is important,” he says, “that CPA firms and their clients partner with a reputable firm that has deep expertise in this field, as implementation of the IC-DISC, while offering extremely powerful benefits to companies, is littered with minefields and traps for the unwary that can cause businesses to entirely miss out on the benefits or claim much less than they actually deserve.”

It is particularly important, Young points out, that accountants consult closely with their clients to identify those that may be eligible for the IC-DISC. This is an area in which providers of specialized tax services can help.

For more information on the benefits of an IC-DISC, please contact alliantgroup’s Jim Young at 713.212.1495 or jim.young@alliantgroup.com.