IC-DISC Offers Substantial U.S. Tax Savings for Architects Working on Foreign Golf Course Design

By Douglas W. Wright, BPM Shareholder
October 17, 2010

A frequently overlooked U.S. tax provision known as the “IC-DISC” can offer substantial U.S. tax savings for U.S. golf course architectural firms working on foreign golf course projects. The IC-DISC tax savings are derived from a reduced 15% U.S. tax rate, in lieu of the normal 34% ‐ 35% rate, on up to 75% or more of the income derived from these foreign golf course projects. Alternatively, the U.S. tax on this income can be deferred indefinitely. In either case, the resulting U.S. tax savings can mean a substantial increase in after‐tax income and cash flow.

Background on IC-DISC

The IC-DISC stands for “Interest Charge – Domestic International Sales Corporation,” a lengthy and complex name for this tax incentive which was introduced in its current form by Congress in 1984. It was designed to provide a U.S. tax incentive for U.S. businesses to keep certain activities including the performance of architectural services in the U.S. rather than moving them abroad. The IC‐DISC is relatively unknown and often overlooked because other alternative tax incentives were more often used until the last remaining alternative was eliminated in 2006.

Application to Golf Course Architectural Services

In the case of architectural services, the IC-DISC benefit applies when architectural services are provided by a U.S. company or firm with respect to a non‐U.S. construction project. This includes architectural and design services related to foreign golf courses. The services can be performed by employees located in the U.S. The services can also be performed by employees located outside of the U.S., provided they are employed by a U.S. company or firm (for example, in a foreign office or at a foreign project site of a U.S. company).

Basic Structure of an IC-DISC

To utilize the IC-DISC tax incentive, a separate IC-DISC corporation must be established. IC-DISC benefits cannot begin to accrue until this happens. This means that no IC-DISC tax savings can be derived on services income earned prior to the incorporation of the separate IC-DISC entity. However, this is a simple and inexpensive requirement to meet and can be accomplished within about 24 hours.

Moreover, the IC-DISC corporation is merely a “paper” entity without any actual operations, employees, office space or tangible assets. It remains virtually invisible to employees and customers. It serves solely as a Congressionally‐mandated vehicle needed to qualify for the IC-DISC tax benefits. It is required to have separate books and records, and it is through the related bookkeeping entries that IC-DISC benefits are tracked and determined.

A qualified professional services firm such as mine (Burr Pilger Mayer, Inc.) should handle all of the relevant actions needed to set‐up the IC-DISC and then maintain the separate accounting books for the IC-DISC. There are various other non‐burdensome IC-DISC tasks and technical requirements which must be met on an annual basis, and it is similarly recommended that these be performed or monitored by a qualified firm lest the IC-DISC be “disqualified” and the related tax savings be lost.

The specific IC-DISC ownership structure depends upon a company’s or firm’s circumstances. Typical IC-DISC ownership structures would be as follows.



Use and Tax Benefits of an IC‐DISC

In the case of a U.S. golf course architecture company or firm, up to 75% or more of the income derived from foreign golf course projects can be shifted to the IC-DISC entity, which is fullyexempt from U.S. tax on its income. The architectural company or firm has a corresponding reduction in its taxable income, meaning an immediate tax savings equal to 34% – 35% of the income shifted to the IC-DISC. U.S. tax on the IC‐DISC income can be indefinitely deferred as long as it is retained by the IC-DISC. Alternatively, the IC-DISC can distribute its income as a “qualified dividend” taxable at a current 15% preferred U.S. tax rate. This represents a permanent reduction in U.S. tax on the IC‐DISC income of 20 percentage points!

An example might be helpful to understanding the use and tax benefits of an IC-DISC. Let’s assume that Firm A has established an IC-DISC. Firm A then contracts directly with either a U.S. or a foreign customer to provide architectural services for a planned foreign golf course. For its services Firm A earns net pre‐tax income after all related expenses of $1 million.

Without the IC-DISC, the firm or its owners would be subject to U.S. tax of $350,000 on this income. With the IC-DISC, however, the firm is able to shift 75% of its fee, or $750,000, to the IC‐DISC. Since the IC-DISC is tax exempt, no U.S. tax is due on this income as long as it is retained by the IC-DISC. If the IC-DISC distributes the income, it will be subject to a current U.S. tax rate of 15% on the income in lieu of the 35% rate which would have otherwise applied. This 20 percentage point tax rate reduction results in $150,000 of permanent cash tax savings (i.e., $750,000 x 20%).

Increased Cash Flow and Liquidity

It is critical to understand that income is shifted to an IC-DISC merely through bookkeeping entries. No cash is moved to the IC-DISC or into a separate bank account. In fact, the operating cash flow of the architectural company or firm will actually increase from use of the IC-DISC, due to the substantial reduction in U.S. tax that would otherwise be incurred on such income.

IC-DISC liquidity also provides a tool for combating lending and debt restrictions that inhibit diversification and risk management. Rather than being reined in by restrictions, such as salary and dividend limitations and debt covenants, shareholders have flexibility to take actions that serve the best interests of the business.

Conclusion

If yours is a U.S. golf course architectural company or firm working on foreign golf course projects, your company, firm and you may derive substantial U.S. tax savings from the IC-DISC. IC-DISC tax savings are truly “low-hanging” fruit to be harvested by those who are properlyinformed. But time is of the essence in establishing the IC-DISC company, since tax savings cannot be claimed on income earned before the IC-DISC is established.

The experts at Burr Pilger Mayer, Inc. can quickly confirm the viability of the IC-DISC in your specific circumstances and establish appropriate IC-DISC arrangements. With many years of IC-DISC experience, our international tax team can help you take advantage of this powerful tax incentive. We frequently work collaboratively with clients otherwise serviced by other CPAs and advisors, so welcome questions from your CPAs or other advisors.

This publication contains information in summary form and is intended for general guidance only. It is not intended to be a substitute for detailed research nor the exercise of professional judgment. Neither BPM nor any member of the BPM firm can accept any responsibility for loss brought to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.