Posts Tagged ‘business tax’

Tax Savings for Companies Selling in Foreign Countries

Friday, February 1, 2013 @ 01:02 PM
Author: Steven Ness

An Interest Charge Domestic International Sales Corporation (commonly called an “IC-DISC”) is a unique tax savings entity, available to U.S. companies that have substantial sales to foreign countries, which includes sales to Canada and Mexico. An IC-DISC reduces tax liability by converting a portion of export income, which is taxable at ordinary income rates as high as 35% into qualified dividends generally taxed at 15%.

In short, an IC-DISC is a tax-exempt, domestic “paper” C corporation set up to receive commissions on the company’s export sales. The IC-DISC must have its own bank account, keep separate accounting records and file U.S. tax returns. But this separate entity need not have an office, employees or tangible assets nor is it required to perform any services.

To qualify as and IC-DISC a U.S. corporation must:

1. Be incorporated in one of the 50 states or District of Columbia;
2. File an election with the IRS to be treated as an IC-DISC for federal tax purposes (the application can be found at http://www.irs.gov/pub/irs-pdf/i1120icd.pdf);
3. Maintain a minimum capitalization of $2,500;
4. Have a single class of stock;
5. Meet a qualified export receipts test and a qualified export assets test;

Meeting a qualified export receipts test and a qualified export assets test indicates that at least 95% of an IC-DISC’s gross receipts and assets must be related to the export of property whose value is at least 50% attributable to U.S. produced content. Some services, such as engineering and architectural services related to construction projects outside the U.S. may also generate qualified export receipts.

The internal processes followed by an IC-DISC can be summarized as follows:

1. An owner-managed exporting company organizes a new C corporation and applies for qualification as a tax-exempt IC-DISC;
2. The exporting company pays IC-DISC a commission;
3. The exporting company deducts commission from ordinary income taxed at 35%;
4. The IC-DISC pays no tax on the commission;
5. The shareholders of the IC-DISC must pay income tax on dividends at a qualified rate of 15%;
6. The result is 20 percent tax savings on commissions.

Steven E. Ness is a busienss attorney with Business Law Center in Minneapolis Minnesota

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Tax Plans Must Have A Business Purpose, and Sometimes Even Tax Attorneys End Up in Jail

Friday, September 14, 2012 @ 10:09 AM
Author: Peter Brehm

When I was in the mire of my tax education I was presented with this seemingly contradictory reality:

1. Congress creates rules in the tax code (including deductions and credits) to encourage businesses to engage in specific types of conduct (buy certain products, hire certain types of employees, or provide specific benefits); and

2. Congress (and the IRS) also creates rule prohibiting businesses from claiming those tax benefits unless there is a substantial business purpose for the transaction other than tax savings.

One of the frustrating parts of tax planning is coming to grips with the idea that Congress wants to control your behavior with rewards, but then denies you the reward if they find out that you only did it for the money. Its a bit like offering someone $1,000 to be your friend, and then refusing to pay them when you find out that they only liked you for your money. So the game becomes convincing the IRS that you love their sense of humor and just as much as (if not more than) their deductions.

Successful business owners are like gold to tax planning consultants because they have the two things that all tax planners need: taxable income and a desire to send less of that income to the government. As a result, the more successful you are, the greater the chance that you will find yourself in contact with an army of tax planners and consultants. Tax planners (and tax attorneys) range from conservative (declare all income at the highest possible tax rate), moderately creative (use the plain language of the tax code to reduce taxes within the letter of the law), aggressively creative (expand the possible meaning of the code, and fill in gaps of the code to aggressively reduce taxes), to criminally creative (knowingly engaging in planning and conduct that is contrary to the law to avoid taxes at all costs).

Its not always easy to tell which kind of adviser you are dealing with, but the line you should never cross (and a clear indication that you are entering the world of the criminal planner) is a fairly bright one: would I do this transaction if I wouldn’t save taxes? If the answer is yes, then you are probably fine. If the answer is a resounding NO, there is a good chance that something is amiss, and that you should speak with a lawyer (unrelated to the people selling you their plan) about the transaction. For example, would you take all of your liquid assets, transfer them into a trust controlled by someone you don’t know in another country, who then deposits the funds in a third world bank? If you can think of a good reason for your business to do that, and you were going to do that anyway, any tax benefits will probably be appropriate. If the primary, if not exclusive, reason was to save taxes then tough times may be ahead.

Often times these people will have already anticipated your objections, and may present you with a letter from a reputable lawyer or accounting firm to alleviate your fears. Rather than calm you, let me suggest that this is exactly the time to reach out to a qualified tax lawyer who has no stake in the proposed transaction. Why? Because some lawyers (and I am going to shock some of you here) are not particularly ethical.

Yesterday a lawyer out of Chicago pled guilty to conspiracy and tax evasion (in a scheme in which she made $1.6 Millon). Her crime? Knowingly writing false tax opinion letters. In those letters, the attorney opined that transactions without any purpose other than tax avoidance had “a substantial business purpose”. The client needed the letter to justify a transaction that was solely for tax avoidance and the lawyer was willing to write the letter for money. Now, they are all going to prison. Here is a copy of the plea agreement if you have ever wanted to see one.

There are a LOT of very good and ethical tax planners in this country, with a LOT of very good and creative tax planning ideas and opportunities. And to be very clear, the tax code is almost beyond common sense comprehension, and some of the best legal and tax minds will disagree among themselves about what the code does and should say. So nearly all tax planning, even good faith conservative planning, has some level of risk associate with it. But there are three things I want people to understand: 1. whatever planning you do should generally be tied to a purpose beyond tax savings; 2. there are professionals who will advise you to take a tax benefit you are not entitled to so that they can make money off of your money; and 3. when you enter into those kind of transactions, no matter how many letters you have saying it was OK, everyone can end up in jail.

Peter Brehm is a tax attorney practicing with the Business Law Center in Minneapolis, Minnesota and Scottsdale, Arizona.

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Coming Tax Changes Will Affect Small Business Owners

Saturday, June 30, 2012 @ 09:06 AM
Author: Peter Brehm

While it is hard to eliminate a tax, it seems less difficult to eliminate deductions and increase tax  rates.   There were a number of significant change that are effective this year, and even more that will impact you in 2013.

Among tax provisions that expired at the end of 2011 are the following:

  1. The so-called “AMT patch.” As result, an estimated 27 million more taxpayers are subject to the Alternative Minimum Tax this year.
  2. The deduction for state and local sales taxes.  About 11 million taxpayers claimed this deduction last year.
  3. The deduction for mortgage insurance premiums.  About four million taxpayers recently claimed this deduction.
  4. A provision allowing persons over age 70-1/2 to make tax-free withdrawals from their Individual Retirement Accounts (IRAs) to make charitable contributions.

The IRS believes that Congress is likely to extend many of these and other expired provisions retroactive to January 1, 2012, but neither taxpayers nor the IRS know for certain what will happen and therefore cannot make plans.  For example, a home-buyer trying to decide whether to utilize a loan package that includes mortgage insurance now lacks important information.  So does a pensioner trying to decide whether to tap his IRA to make a charitable donation.

An even larger number of provisions are set to expire at the end of 2012, including the Bush-era cuts in marginal tax rates, reduced tax rates on dividends and long-term capital gains, various marriage penalty relief provisions, certain components of the child tax credit, the earned income tax credit, and the adoption credit, and the moratoria on the phase-outs of itemized deductions and personal exemptions.

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