Export profits, IC-DISC and your buzzkill accountant

Ed Marsh | Apr 17, 2015

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What you don't know you don't know

Loyalty is great.  It's rare and meaningful - and therefore it's valuable.  But sometimes it's a liability - particularly in your professional advisor relationships as your company grows and evolves.  After all, these are 'experts' who you have engaged precisely for the knowledge and expertise they have in specialized areas of practice.

So by definition if you don't know what they know, then you don't know what they don't know that might create exposure or missed opportunity.  And in their defense, they might not either.  Often companies select advisors who are convenient, friendly, and inexpensive or a casual referral and who happen to be appropriate for a certain business stage.  But as the business grows in size and complexity of activity, often they begin to outgrow the relationship.  But what happens then?  Sometimes loyalty becomes a liability.

According to the script

Let me pick on accountants for a minute, because I run into this so frequently - and because for the next few days they'll be too tired to hammer me with feisty replies.

There's a script that plays itself out so frequently that I know it by heart.  In chatting with the CEO, president or GM of a company that's successfully exporting, I ask them how much they've saved through their IC-DISC.  They must have one - it's essentially a 'no brainer' if you have more than $100K in export profits.  (Not familiar with an IC-DISC?  You'll find more detail here.  Short version - with a simple administrative election your export profits will be treated as dividends rather than income.  For most 'pass through' entities that equates to a 16.7% reduction in the tax rate...or nearly $17,000 of additional net on every 100K of export profits.)

Here's where the script kicks in.

CEO - "Nothing that I know of.  Never heard of it.  What was that called?  IC what?"
Me - "An IC-DISC" I say.  "It's a tax structure that substantially reduces the tax rate you pay on profits from export sales."
CEO - "Is that legal?"
Me - trying not to be offended that I look like someone that would peddle some scheme...."It sure is.  And in fact the treatment of dividends that's central to it was made permanent in the tax code recently.  So it's not even at risk of changing as some worried in 2011.  Further it often applies to products you sell domestically which are then exported."
CEO - "How does it work?"
Me - "I'm not an accountant, so here's a simplified version.  You set up a parallel corporation and pay the profits on your export sales to it as commission.  Then the profits of that corporation are treated as dividends which cuts the rate from roughly 40% to roughly 23%."
CEO - "Why hasn't my accountant mentioned this?"
Me - "Great question.  I don't know, but it's not a widely discussed structure.  I wouldn't be surprised if they're not familiar with it."
CEO - "That's really interesting.  I'll have to ask them about it and see if it makes sense.  For all I know we may already have one set up."
Me - "Makes sense.  But let's 'fast-forward' this video.  When you ask, what might they say?  'You already have one.' or 'We talked about that before and it doesn't make sense.' or 'That's not right for your business.'  It's an unusual accountant that will be comfortable responding to you with 'Wow, I should have thought of that, and completely missed it.' or 'I'm not familiar with that.  What is it?'  So when they realize that this would have been sensible for you 5 years and 3 million dollars in export profits ago, and that they've cost you >$500K in extra taxes, what are they going to say?"
CEO - "Yeah, I hear you.  But (s)he'll tell me."
Me - "I understand.  Here's my suggestion.  Let me put you in touch with a couple folks that specialize in this who can tell you quickly whether they see a benefit for you or not.  At least that way you have an objective expert opinion to consider too."

But it's not just the IC-DISC

The IC-DISC stings because it costs you money.  But there are also frequently unmitigated risks and landmines that advisors, expert and familiar with your domestic business but unfamiliar with international work, may miss.

For example:

  • duty of care for employees
  • insurance on foreign receivables
  • nuances in INCOTERMS 2010
  • export compliance issues of denied party screening and even information you carry internationally on your laptop or "deemed exports" of controlled information on your website
  • idiosyncrasies of representative contracts in different markets
  • FCPA compliance exposure and D&O cost of defense
  • low cost working capital to fulfill export orders

That's hardly an inclusive list, but it's representative of the kind of really important topics that often slip under the radar.

The point is that it's up to you to make sure that your professional advisors can support your international sales.  They may not know more than you.....and what they don't know can cost you opportunity and expense.

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