The IC-DISC has been around since the 1970s, so does your strategy need to change or adapt with tax reform? Depending on the type of business and activities you’re engaged in, it can vary. Here’s what you need to know in this episode of PKF Texas – The Entrepreneur’s Playbook® featuring International Tax Director, Frank Landreneau, CPA.
Frank: So, you can defer income, in other words, not pay tax on income on the first 10 million. And then as long as you redeploy those funds into the business as a form of a producer’s loan, for example…
Jen: This is the PKF Texas – Entrepreneur’s Playbook®. I’m Jen Lemanski and I’m back once again with Frank Landreneau, one of our Approachable Advisors™ and one of the Directors in our International Tax practice. Frank, welcome back to the Playbook.
Frank: Well, thanks for having me back.
What to Know
Jen: So, we’re talking IC-DISC and we mentioned it a little bit last time, but has the strategy changed since tax reform happened? I know before tax reform there were things that you could do for IC-DISC after. Are there different things? What do people need to know?
Frank: So, the strategy has changed a little bit if, depending on what type, how you have yourself organized and your type of business. So, for example the rate arbitrage isn’t the same with regular corporations because now the corporate rate is 21%, the capital gains rate’s 23.8%. So, would you do the DISC for the purpose of a rate arbitrage if you’re a regular C corporation? Probably not.
But for flow through entities, which is where most people in the middle market space do business, you know, partnerships, S corporations, they do business in that form of business. The rate arbitrage is even more stark because the top rate is 37% for individuals and that’s how they’re taxed versus the capital gains rate at 23.8%. So, it’s still a pretty hefty arbitrage for middle market businesses doing business as partnerships in as corporations.
Does your strategy need to change?
Jen: Now do you see IC-DISC changing at all in the future? Or do you think it’ll remain relatively the same?
Frank: It’s been pretty stable, as we kind of mentioned last time, over the course of… since it’s been implemented in the late 1970s. Now it has changed in the 1980s. But more recently, no. And the strategy for regular domestic corporations wouldn’t be to take advantage of the rate arbitrage, but rather deferral. So, you can defer income, in other words, not pay tax on income on the first 10 million. And then as long as you redeploy those funds into the business as a form of a producer’s loan, for example.
And with interest rates going up, that’s why the interest charge piece of the DISC, you’re charged 1.7%.; that was the rate in 2022, 1.71%. That’s a much lower rate if you want to redeploy those funds back into the business. And that’s what a lot of C corporations are doing, or regular corporations are doing, as opposed to taking advantage of that rate arbitrage. So, that’s one big thing that’s changed since tax reform.
Can you still set up an IC-DISC?
Jen: So, this sounds really interesting. If a company hasn’t set up an IC-DISC, is it too late?
Frank: No. As long as you’re doing export activity, we don’t anticipate this provision to change anytime soon. We have a divided Congress, as you know, probably will for the foreseeable future. And so, I would say as long as you’re doing exports, it doesn’t cost that much to actually set up one. Particularly if you’re doing a commission-type existence or doing the deferral strategy that I’ve mentioned. I would say just really look into it, examine what all your options are.
Jen: Perfect. Well, Frank, I think people need to call you if they have questions about IC-DISC?
Frank: Would love to entertain the thought of discussing this with more clients and take advantage of this provision for more taxpayers.
Jen: Perfect. Well, we’ll get you back to talk about some more international topics. Sound good?
Frank: Sounds great. Thank you.
Jen: Great. Thank you. This has been another Thought Leader production brought to you by PKF Texas – The Entrepreneur’s Playbook®. For more information about this and other international topics, visit PKFTexas.com/International. Tune in next week for another chapter.