IC-DISC and Tax Reform Action Plan

IC-DISC and Tax Reform Action Plan

Nov 03, 2017

As Congress continues the task of tackling tax reform, now is a critical time to take a look at your IC-DISC tax planning for 2017 and prior years.  H.R. 1 was released by the House Ways and Means committee on November 2, 2017 and is full of sweeping changes to the U.S. individual and corporate tax systems.  Two items remain relatively intact however.  The IC-DISC is not being repealed, and there is still a significant spread between the top individual tax rate of 39.6%, and the top capital gains tax rate of 20%.  The IC-DISC tax benefits may be even greater for manufacturing entities because the Domestic Production Activities Deduction, DPAD is scheduled for repeal for tax years beginning after December 31, 2017.

 

H.R. 1 proposes sweeping changes to the current tax regimes.  Changes that may or may not impact your IC-DISC benefits include:

  • A lower top individual tax rate for most taxpayers, but still 39.6% for taxable income over $1 million and a micro tax bracket of 46% on taxable income between $1 million and $1.2 million.  If a taxpayer has taxable income over $1.2 million, their tax will be a flat 39.6% on all ordinary income with no benefit of graduated rates.
  • A lower tax rate on pass-through income.  The net effect for most taxpayers is a blended rate of approximately 35%.
  • A lower C corporation tax rate of 20%
  • Elimination of the U.S. Manufacturing Deduction (DPAD)
  • A possible change in the capital gains & qualified dividend tax rate, although it appears that it will remain at 20%.
  • Elimination of the net investment income tax added under the Affordable Care Act, although nothing is contained in H.R. 1
  • A change to a territorial system of taxation from the current worldwide system of taxation.  This change is part of H.R. 1 and will impact multinational businesses in a variety of ways.

 

With so much uncertainty, it is difficult to prepare for all that might happen, however there are certain actions that WTP Advisors recommends you consider for optimizing the IC-DISC tax benefits available to you.

  • Maximize your IC-DISC tax benefits for 2014, 2015, 2016 and 2017.  The IC-DISC provides a permanent tax savings of at least 15.8 percentage points, assuming the highest tax rates.  If you have not optimized your IC-DISC commission for all your open tax years, you are likely leaving valuable tax savings in the hands of the IRS.  We can help you maximize your tax savings and claim tax refunds.
  • Compute your IC-DISC commission on a transaction-by-transaction (TxT) basis using all available grouping and pricing methods. A calculation done in Microsoft Excel, even though marketed as TxT, will usually generate only a fraction of the allowable commission. 
  • Although, not an express tax benefit apparent in H.R.1, taxpayers may want to consider deferring income in the IC-DISC to 2018 to take advantage of deferring the tax on the IC-DISC income for one year.  Additionally, if the 3.8% net investment income tax is repealed at some point in 2018, that would become an additional permanent tax savings.  Many IC-DISC clients are in the habit of recognizing as much of the IC-DISC dividend income as possible in the same year in which the IC-DISC commission expense arises.  This planning makes sense when tax law changes will be increasing tax rates as we saw at the end of 2012.  However, current discussions are focusing on a possible repeal of the 3.8% net investment income tax.  Therefore unlike 2012, planning should at least consider deferring IC-DISC dividend income into 2018 or later tax years.
  • Consider whether some of the alternative uses of an IC-DISC will make more sense for you.  Should I implement an IC-DISC Accounts Receivable Factoring Strategy to increase the IC-DISC income?  Is now the right time to re-examine whether an IRA owned IC-DISC makes sense?  An IRA owned IC-DISC is a strategy that provides a very powerful vehicle for putting considerable funds into your IRA.  Should we switch to C corporation status to take advantage of the 20% tax rate, and if so, how can I use the IC-DISC to pay deductible dividends. 

 

With the release of H.R. 1 on November 2, 2017, we have been provided with a glimpse of how the tax landscape may look in 2018.  Now more than ever, it is important to engage in year-end planning regarding your past, present and future IC-DISC tax benefits.