Tax savings on exports are advantageous but might vanish
For years, farm cooperatives and large operations that sell products to overseas buyers have benefited from the lower tax burden afforded by a provision of the U.S. tax code known as Interest Credit—Domestic International Sales Corporation, or IC-DISC. Yet though the provision remains intact as of this writing, its days could be numbered—and it’s probably best to avoid setting up such an entity until your accountant advises otherwise.
“If House Republicans’ destination-based tax goes through or something similar, it is likely that IC-DISC will be eliminated,” says Paul Neiffer, principal at CliftonLarsonAllen and a Top Producer columnist. “Export sales [would be] tax-free anyway.”
The same wait-and-see approach is probably best for most tax decisions until it becomes clear which reforms President Donald Trump will push and which ones Congress will ultimately approve, Neiffer advises producers.
It’s also a good idea to approach IC-DISC with caution to ensure it will yield enough financial benefits to offset startup costs that can exceed $10,000, adds Drew Long, tax department senior manager at Naperville, Ill.-based Sikich LLP.
“You can’t just say, ‘Voila, here’s my DISC and I don’t have to do anything,” Long says. “You have to operate it as a real company.”
Global Sales. As written in the tax code, an IC-DISC enables farm income to be taxed at capital-gains rates. It is a permanent savings that allows large operators, who would normally fall into a tax bracket of nearly 40%, to be taxed on sales to international markets at a rate of between 20% and 23%, Neiffer says.
Many producers have realized the savings not through their personal farms but through cooperatives. IC-DISC requires participating entities to trace the path of their commodities from the time they leave the U.S. to the time they arrive in a country such as China. Individual operators can’t often provide that level of transparency because they can’t control where their grain goes after it is delivered to an elevator. Yet cooperatives can determine that 40% of sales, for example, are sent overseas. Those sales can be taxed at the lower rate, and the savings can be passed onto farmer-members in the form of
a qualified dividend.
“It started in the '70s as a method for encouraging exports,” Long explains. In 2003, as a workaround to World Trade Organization policies, the Jobs and Growth Tax Relief Reconciliation Act, better known as the Bush Tax Cuts, allowed corporate dividends to be taxed at a 15% rate instead of a 35% rate. Thus, cooperatives and farmer groups with stock in grain elevators found renewed interest in the tax provision, he says.
“I’ve seen commission checks that are pretty high just depending on where they’re located,” Long says. “In western Illinois or Burlington, Iowa, [near the Mississippi River] you might see a lot of exports.”
Wait And See. Still, participation is limited. “When we consult with an elevator for the first time and are looking at opportunities, I find it pretty rare that they have them,” Long says. “It seems odd to write a check and get a benefit.”
Now, dividends could go away. Tax reform is almost certain in 2017, and an elimination of taxes on exports would strip IC-DISC of financial value for farmers.