Tax filing day for 2020 is behind us now, but it is not too early for scrap metal recyclers to start planning for 2021 federal income taxes.
Scrap metal recyclers who export may stand to benefit from an export tax incentive that is easy to set up and available for use this year. Although there is uncertainty about various tax proposals and future tax rates, the IC-DISC is currently a permanent part of the Internal Revenue Code and can mean significant tax savings as it seeks to encourage U.S. exports.
The IC-DISC stands for the Interest Charge Domestic International Sales Corporation. It has been part of the Internal Revenue Code since 1971. It was established as a financial incentive to U.S. exporters. The IC-DISC was designed to create permanent tax savings—allowing U.S. exporters to increase their global competitiveness by reducing their U.S tax liability on this export income. Numerous scrap metal recycling companies with some export business already take advantage of this provision.
How it Works
The technicalities and terminology of operating an IC-DISC can seem complicated, but once you boil it down, an IC-DISC simply serves as a parallel entity that is not at all visible to your customers. In a nutshell, to utilize this tax incentive, a business which engages in exporting sets up an IC-DISC as a separate company, a C corporation, of which the exporter is the shareholder. The IC-DISC earns the income that would otherwise be taxable to the exporter/shareholder. The IC-DISC earnings are paid as dividends to the exporter/shareholder. The difference between the dividend tax rate and the ordinary tax rate results in the tax savings when these dividends are distributed to the shareholder.
Who Qualifies?
According to the website of Export Advisors, a Texas-based IC-DISC consulting firm, an IC-DISC may be set up by companies that meet the following criteria:
- Exported products are manufactured in the United States.
- The exporter is a privately held company.
- While there is no export sales minimum to qualify for an IC-DISC, experts estimate about $3 million in annual exports is a reasonable threshold where the tax savings balance the expense of maintaining an IC-DISC.
With all the uncertainty surrounding potential changes to the tax code, would it still be worth setting up an IC-DISC?
We asked David Spray of Export Advisors. He believes the IC-DISC is definitely still a worthwhile tax incentive. In fact, if the regular income tax rates go up, the savings from the IC-DISC would become even more valuable. “It’s worth taking advantage of it for 2021,” Spray said. “It still makes economic sense, even if it were only for one year.” Spray said the scrap metal recycling industry is a prime user of the IC-DISC because the industry is comprised of numerous privately held companies that do a substantial amount of exporting.
To establish an IC-DISC, a taxpayer needs to set up their C corporation, obtain IRS approval, keep separate accounting records and bank accounts for the IC-DISC and have it file its own tax return. Spray said his firm Export Advisors provides this service to many scrap metal recycling companies, setting up and completing the paperwork for their IC-DISC. He said the process takes about one week. Although tax savings will vary based on the amount of export income, according to the Export Advisors website, the typical client nets about $100,000 annually, after all fees are paid, in tax savings. The website also provides a calculator so companies interested in an IC-DISC can do their own back-of-the-envelope evaluation.
ScrapWare Corp., which provides software to scrap metal recycling companies, has a number of clients who utilize this tax incentive. Within ScrapWare’s software there are links to important hardware and service vendors used by ScrapWare customers, including a link to Export Advisors. Additionally, ScrapWare has built-in capability to enable its customers to rapidly generate annual reports and files required for an IC-DISC.
With the economy picking up steam and demand for copper, steel and other materials on the rise, now would be a good time for scrap metal recyclers who export to explore if this scrap metal export tax incentive could be beneficial to them. Tax filing day for 2021 is less than a year away!
ScrapWare Corp., of Rockville, MD, has been providing software to the scrap metal recycling industry for over 30 years. ScrapWare uses an Oracle database to provide a cloud-based software solution to manage all aspects of a recycling business. With numerous modules, extensive technical support, remote installation and online training, ScrapWare helps recycling companies with compliance, efficiency and profitability. Check out ScrapWare’s website, read the user testimonials, and see its offerings for your recycling software solution.