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

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.