The CARES Act does not have any specific provisions related to Interest Charge-Domestic International Sales Corporations (IC-DISCs), but a number of the provisions in the Act can indirectly impact - in a negative manner – the export incentive that helps convert higher taxed (37%) income to lower taxed (23.8%) income.
Selective use of CARES provision might allow for a benefit in reducing taxable income without harming the amount of the DISC commission income in certain situations.
The CARES Act
The Act provides for a number of favorable taxpayer provisions including:
- Loosening the business interest expense limitation under Sec 163(j) from 30% to 50% of adjusted taxable income;
- Allowing business and individual net operating losses (NOL) arising in 2018, 2019 and 2020 to be carried back five years (there had been no carryback allowed after the Tax Cuts and Jobs Act of 2017);
- Changing “qualified improvement property” retroactively to 15-year property subject to the 100% bonus depreciation deduction for 2018 property (a technical correction to the TCJA-2017).
This could result in a decreased amount of taxable income, including going back to 2018 and filing amended returns. The issue will be: does this impact the amount of DISC commission expense for the year and will amended DISC returns then be required?
IC-DISC Commission Income
The amount of the DISC income is based upon special pricing rules that are impacted by the related supplier’s taxable income. If taxable income of the related supplier is between 4% and 8% of sales, then claiming some of the above provisions may not impact the amount of the DISC commission (while lowering taxable income of the related supplier). If the taxable income only goes down to 4% (or slightly lower), then it may still be worth claiming some of the benefits of the CARES Act. It may have a larger impact if transaction-by-transaction pricing is being used.
Modeling of the results can help in the decision process as well as considering the amount of DISC income being deferred from taxation each year. Moore Doeren Mayhew would be pleased to discuss your alternatives and help you model out your particular situation.