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Exporting, the last great legal tax loophole

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  • International business activity offers often-overlooked tax saving opportunities
  • A “DISC” may be the solution that provides significant tax benefits

Recently, Janover acquired a client who exports nutritional supplements. As Janover went through our regular process of developing a detailed understanding of a new client’s business and operations, we discovered this client was not utilizing special tax incentives the IRS makes available to exporters. Specifically, they had not set up a separate entity called a “DISC” (“Domestic International Sales Corp return – Form 1120IC-DISC”).

A DISC is a “paper company” formed under a special section of the Internal Revenue Code. The DISC allows the Company to separate their international business activity from their domestic activity. The “paper company” does not pay Federal or State income taxes on the
international activity; however, it does pay interest charges as if it borrowed the tax liability from the IRS. The DISC does this by filing Form 8404 which is called “Interest Charged on DISC-related Deferred Tax Liability”. The interest charge is a calculation based on the deferred income multiplied by the base period T-Bill rate factor, which for 2011 was .0022. (This is less than a ¼ of a percent – thus, there is almost no interest!). If the international operations are successful, the accumulated DISC income will grow and the DISC will eventually need to deem a distribution to the owners. However, this deemed distribution will be taxed as a dividend, which currently is taxable at a rate of only 15%, as opposed to a tax rate of 35% on ordinary income (such as the typical earnings of a business). Thus, not only is the tax deferred for almost free, but when the tax is ultimately paid, it is at a rate less than half of what the rate would have been in the typical business structure.

By taking the time to truly understand the client’s business, Janover was able to find tax opportunities that worked greatly to the client’s benefit – an example of the way Janover works to build “relationships beyond calculation.” In this case, Janover’s actions since inception have deferred almost $6,000,000 in taxable income, deferred over $2,000,000 in taxes and, if the current dividend tax rate remains in effect, will result in a permanent tax savings of over $1,100,000 and growing!

To learn more about DISC – and other potentially beneficial tax structures and regulations – email Janover at info@Janoverllc.com

For additional Janover case studies, go to: blog.janoverllc.com

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