2011 – 2012 Tax Strategies for Business
Tax season is upon us and it’s time to ask yourself these two questions:
1. What could I have done to lower my taxes in 2011?
2. What is keeping me from doing it now for 2012?
To help stimulate this conversation with yourself, I contacted George Elias, President of Premier Tax Consulting, LLC. George is a CPA that focuses on specialty tax services for businesses. These services range from sales and use tax reviews to personal property tax strategies. His firm partners with a clients CPA to help increase cash flow by minimizing tax out flows. Recently, George and I discussed some little know tax strategies that businesses can take advantage of.
Bob: George, are there any tax incentives that are not well known to the small / Mid Size business owner that may help them save on their tax bill and increase their cash flow?
George: Yes. Two of the most commonly overlooked tax incentives are the Research and Development Tax Credit (“R&D Credit”) and the tax benefits available to US exporters through an Interest Charge Domestic International Sales Corporation or commonly known as the IC-DISC.
Bob: Let’s start with the R&D credit. How does a small business qualify for the R&D tax credit?
George: Most companies are already conducting activities every day that they do not realize will qualify for the credit. They tend to believe they are merely doing their job, and not something unique enough to warrant an incentive. However, any company that is developing a new or improved business component may actually be engaging in qualifying research activities. A business component is defined as any product, process, technique, computer software, formula or invention held for sale or used in a company’s business. Companies are always trying to improve their products, such as making them more reliable, stronger, or lighter with different materials that would improve quality and be more economical in this competitive market place. A properly conducted credit study will determine whether the development effort will qualify for the credit, and if so, what associated expenses can be used in determining the credit amount.
Bob: What are the benefits of an R&D tax credit study?
George: There are numerous benefits to having an R&D tax credit study conducted by a firm such as Global Tax Consulting. First the company can obtain federal tax credits for qualifying activities and use this cash to invest in their business, create jobs, and maintain their competitive advantage. These companies can also file for a state R&D tax credit, if their state allows for such an incentive. Some states have a larger R&D tax credit than the federal credit, so it can really generate significant cash to the company. It should be mentioned that tax credits are better than a tax deduction, since tax credits are a dollar for dollar reduction to your tax liability.
Bob: Is the R&D credit limited to manufacturing companies?
George: No Bob it is not. Although it is common to think that you have to be a manufacturer to qualify for the R&D tax credit, if you look at the definition of a business component you see that computer software and formulas qualify as well. For instance, we do a lot of work for financial institutions and insurance companies that are developing software for their internal use. Software developers that are coding software for sale are also a good candidate for the R&D tax credit. This is probably the most overlooked area of the R&D tax credit.
Bob: What should a company do if they think they qualify for the R&D credit?
George: They should talk with their CPA and call a firm like GTC to analyze the opportunity. We generally discuss the qualifying criteria with the company to determine if they have qualifying activity and then provide a high level estimate of the benefit. Based on that analysis, the company can then decide on how to proceed.
Bob: Let’s talk about the Interest Charge Domestic International Sales Corporation (IC-DISC). What is an IC-DISC and who can use an IC-DISC?
George: The IC-DISC is a legal entity that becomes a sales agent for products exported outside the U.S. The normal structure of the DISC set up is that the IC-DISC becomes a wholly owned subsidiary of the operating company (i.e. S Corporation) and receives a deductible commission for its services.
Companies that manufacture, produce, extract or grow their product in the U.S. and are shipping their product outside the U.S. can use the IC-DISC. The IC-DISC has technically been around since 1971 and in its current form since 1984. It is the last remaining exports incentive for U.S companies that have not been deemed an illegal trade subsidy by the World Trade Organization. Because of the Bush tax cuts, the IC-DISC has become very attractive to Closely held C Corporations, S Corporations, Limited Liability Corporations, Partnerships and Sole proprietors by providing a 20% permanent tax savings on the net profits of a company’s exports.
Bob: How does the IC-DISC work?
George: The IC-DISC receives a commission on the net profits for goods exported outside the U.S. The commission is a tax deduction for the operating company (at a general tax rate of 35%). The commission would remain with the DISC until they are dividend back to the operating company and then would flow through to the shareholders of the operating company as a qualified dividend taxed at the current 15% tax rate.
Bob: Are manufacturers the only ones that can qualify for IC-DISC benefits?
George: No Bob. Actually manufacturers are the types of companies that come to mind first when you think of qualifying for the IC-DISC benefits, but there are others that can qualify for the DISC as well. This would include distributors, exporters, and recyclers just to name a few as long as they know that the product being exported has been substantially manufactured, produced, extracted or grown in the U.S. The most overlooked companies that can qualify for the IC-DISC are architectural and engineering firms that are designing projects that will be built overseas. These projects would relate to real estate being designed here in the U.S with the intent of it being built outside of the U.S. Examples would include buildings, roads, dams, bridges, and canals, just to name a few.
Bob: Why would a company work with you to set up an IC-DISC and what value do you bring?
George: Great questions Bob. There are several reasons why a company looking to set up an IC-DISC needs to make sure they are using the right company to provide this service. They are the IC-DISC formation and commission. Let’s start with the IC-DISC set up and formation. When we set up an IC-DISC we make sure that not only are the normal formation documents are in place; such as, the Articles of Incorporation, Stock Certificates and By Laws but they also h the necessary intercompany agreements in place to protect themselves in case of an IRS audit. Law firms or CPA firms that set up these IC-DISCS may not include all of the inter-company agreements that need to be in place and thus the client will have to incur additional fees to have these documents created. When we set up an IC-DISC we include all necessary documents and for a cost less than what a law/CPA firm will charge.
The next reason that a company needs to make sure that are using qualified people is to compute the optimal amount of IC-DISC commission. This commission amount creates the benefit that is the sole reason to have an IC-DISC in place, and not having the right company compute your commission can cost you thousands if not hundreds of thousands of dollars. For example, we have come across companies that already had an IC-DISC in place and that we have been asked to perform redetermination of benefits computed in prior years. We have found up to 8 times more benefit than what was computed by the previous provider. Generally, the reason for this deficiency is that the previous providers computed the commission by only using the 50% of net profits or the 4% gross receipt method, when there are many more methods available to compute this amount. We use proprietary software to compute the commission, which takes into consideration all allowable methods. In addition, we also do a transaction by transaction (T-by-T) analysis to compute the DISC commission. A client can have hundreds if not thousands of transactions in a given year and the commission on each one of those transactions is allowed to be separately calculated using all allowable methods.
Bob: George, Thank you for sharing these great ideas.
If you wish to speak with George in further detail about these strategies, please contact him at
George.firstname.lastname@example.org. His office number is 330-225-7034.