FOR LIVE PROGRAM ONLY IC-DISC Strategies: Mastering the ...

1 WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live PROGRAM : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the PROGRAM , you can simply log in using your original instructions and PIN. IMPORTANT INFORMATION FOR THE LIVE PROGRAM This PROGRAM is approved for 2 CPE credit hours. To earn credit you must: Participate in the PROGRAM on your own computer connection (no sharing) if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10).

2 Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the PROGRAM plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. To earn full credit, you must remain connected for the entire PROGRAM . IC-DISC Strategies: Mastering the Complex Operational Challenges Anticipating IRS Audit Risks, Calculating Commissions, and Tackling Computational Intricacies THURSDAY, NOVEMBER 10, 2016, 1:00-2:50 pm Eastern FOR LIVE PROGRAM ONLY Tips for Optimal Quality Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection.

3 If the sound quality is not satisfactory, please e-mail immediately so we can address the problem. FOR LIVE PROGRAM ONLY , 2016 IC-DISC Strategies Neal J. Block, Senior Counsel Baker & McKenzie, Chicago Mark C. Gasbarra, CPA, National Managing Director Forte International Tax, Evanston, Ill. Randall Janiczek, CPA Plante & Moran, Grand Rapids, Mich. Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

4 You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. FUNDAMENTAL CONCEPTS OF IC-DISCs Randall Janiczek, Plante Moran 6 Domestic International Sales Corporations (DISCs) Background and tax benefits of DISCs General review of tax benefits of DISCs How the DISC came to be Common DISC structures Requirements of a DISC Initial requirements Annual requirements Export property Other considerations 7 Domestic International Sales Corporations (DISCs) DISC benefit arises as follows: Commissions paid to a DISC reduce taxable profit of related supplier corporation deductions at ordinary rates DISC is tax-exempt entity Sect.

5 991 income can be deferred DISC dividends received by individual shareholders are qualified dividends taxed at the capital gains rate Income can be taxed at lower capital gain tax rates 8 How DISCs Came To Be 1971: Congress enacted DISC provisions tax on DISC income was deferred until it was distributed 1970s 1980s: Trading partners challenged DISCs as allegedly violating General Agreement on Tariffs and Trade (GATT) 1984: Congress enacted foreign sales corporation (FSC) provisions FSCs were foreign corporations which effectively allowed US taxpayers to obtain benefits similar to the former DISC structure DISC was modified to allow deferral of DISC income from annual maximum of $10 million of export receipts and introduce interest charges on deferral (the DISC became the IC-DISC ) 9 How DISCs Came To Be (Cont.)

6 Late 1990s: European Union (EU) members complain to World Trade Organization (WTO) that FSC represents an illegal export subsidy, but IC-DISC was not challenged 2000: Congress repeals FSC tax scheme and enacts extraterritorial income exclusion (ETI or EIE); EU immediately lodged complaints 2003: Congress enacts favorable dividend tax rates for individuals Tax rate on qualified dividends drop from 35% to 15%, creating an opportunity for permanent savings 10 How DISCs Came To Be (Cont.) 2004: Congress repealed ETI and replaces with Domestic Production Activities Deduction 2006: IRS becomes aware of IC-DISC planning and is looking for revenue raising provisions and proposes legislation to treat DISC dividends as not qualified but the legislation is not passed 2007: Repeal of capital gain rate for DISC dividends is proposed but not passed.

7 Dec 31, 2012: Favorable dividend tax rates were to sunset but legislation extends favorable qualified dividend rate Rate increased from 15% to 20% 11 Commission reduces taxable profit passed through to S corporation shareholder (up to tax savings). DISC is not subject to tax. S corporation shareholders pay 20% tax on DISC dividends (Plus NIIT). Shareholders may be subject to an interest charge for the tax deferral on DISC earnings not distributed General Review Of DISCs: Pass-Through Structure Shareholders S Corporation DISC Commission Dividend 12 General Review Of DISCs: C Corporation Structure Commission reduces taxable profit of C corporation (up to 35% tax savings) DISC is not subject to tax C corporation shareholders pay tax at 20% on DISC dividend (Plus NIIT) Shareholders are subject to an interest charge for the tax deferral on DISC earnings not distributed Shareholders DISC Commission Dividend C Corporation 13 DISC Initial Set-Up Commission DISC vs.

8 Buy/sell DISC Domestic corporation (C corporation) Must be a domestic corporation incorporated under the laws of any state or the District of Colombia Determine state tax implications Single class of stock $2,500 of capital 14 DISC Initial Set-Up (Cont.) Form 4876-A election File within 90 days from the beginning of tax year or inception of entity Establish books and records by the end of first year of operation 15 DISC Annual Maintenance 95% qualified gross receipts test 95% qualified export assets test $2,500 capital on each day of tax year Timely payment of commission to IC-DISC File IC-DISC income tax return Maintain IC-DISC books International boycott reporting 16 DISC Annual Maintenance (Cont.)

9 95% qualified gross receipts test Qualified gross receipts are at least 95% of IC-DISC gross receipts for the year. Qualified gross receipts: Sale, exchange or other disposition of export property Lease or rental of export property used outside of Related and subsidiary services Dividends from related foreign export corporation Interest on obligations that are qualified export assets , producer s loans Engineering and architectural services 17 Export Property For DISC ( ) Manufactured, produced, grown or extracted in the by a person other than a DISC Held primarily for sale, lease or rental for direct use, consumption or disposition outside the Not more than 50% of fair market value of the export property can be attributable to foreign content.

10 Consider qualified export property sold to distributors 18 DISC Annual Maintenance (Cont.) 95% qualified gross receipts test (Cont.) Other receipts to consider Sales made to distributors Sales made to foreign disregarded entities Excluded receipts Export property is for ultimate use in the The sale, lease, etc. is accomplished by a subsidy of the government. The export property is for the use by the US government, where the use is required by law or regulation. 19 DISC Annual Maintenance (Cont.) 95% qualified export asset test At least 95% qualified export assets at year-end are qualified. Categories of export assets Export property Working capital Only amount necessary for required working capital Commission receivable Stock or securities of related foreign export corporation Producer s loans 20 DISC Annual Maintenance (Cont.)