Export Incentive Viable Option For Producers

Ethanol producers exporting product may want to look into the Interest Charge-Domestic International Sales Corp. export incentive, which could qualify them for a 20 percent lower tax rate, writes Donna Funk of K-Coe Isom.
By Donna Funk | January 14, 2015

In the past four years, U.S. ethanol exports have increased 47 percent. If you're one of the many producers who sell ethanol internationally, you may qualify for the Interest Charge-Domestic International Sales Corp. export incentive. To encourage export activity in the global market, the government incentive rewards businesses for global reach and impact by offering up to a 20 percent lower tax rate for certain types of products sold internationally.

The export incentive is a great way to manage tax impact and preserve cash, ultimately returning value to shareholders. Under this tax strategy, the exporter pays commissions to the IC-DISC. The commissions are deductible as an ordinary business expense by the exporter. The IC-DISC then pays a qualified dividend to the shareholder or shareholders of the IC-DISC. Generally, the ordinary tax rate for income on exports of inventory items is about 34 percent. The IC-DISC lowers this, generating approximately 15 percent savings, an incredible strategy for selling a product in the global market.
While a huge benefit, the rules are complex.

There are qualifications that must be met in order for international sales to qualify as export sales eligible for IC-DISC treatment, as well as certain thresholds that must be met and maintained as they relate to classes of stock, minimum capital, asset levels, etc. It is important to know and understand all the details, but also important to remember that once you understand them, it is not hard to create and maintain the IC-DISC structure to maximize the tax benefits associated with it.

The IC-DISC benefit is recognized by the Internal Revenue Service and has withstood scrutiny in the past. Like all good things seen as too good to be true, it comes under attack occasionally and is therefore targeted for repeal. So far, the benefit has been accepted widely enough to withstand the attacks.

If you are exporting just once or inconsistently, the incentive might not be a good option for your business. But for those producing a product manufactured in the U.S. and exported—and can prove it was exported—it could be considered a qualifying activity.

For instance, one K-Coe Isom ethanol client began exporting several years ago. We monitored export activity for about three years and, when the plant reached a significant export volume level, we recommended they implement the IC-DISC strategy. Currently, the company exports about 35 percent, or about 40 million gallons, of its total production and is maximizing its tax savings.

Given the trend, K-Coe Isom expects ethanol export activity to continue at varying levels based on competitive market conditions, making this incentive a viable option for even more ethanol producers. We are working with many clients who export due to ethanol being such an attractive,  low-cost, carbon molecule. By helping establish the right structure, and ensuring they are complying with the rules and regulations as defined by the IRS, they are realizing the tax advantages of the export incentive.

To determine the benefit for your specific circumstance and if the export incentive is worth pursuing, consult with your financial services partner.

Authors: Donna Funk, CPA
Principal, K-Coe Isom