Tuesday, February 19, 2013

Certain Services are Eligible for "DISC" Treatment

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When most people consider the significant tax advantages of using a domestic international sales corporation (DISC), they think first about the inventory and other physical assets they intend to sell outside the United States.  Generally forgotten is the fact that certain  service revenues are eligible to receive DISC treatment as part of the DISC export revenue.  These eligible services include: (a) related and subsidiary services; and (b) architectural and engineering services on construction projects.

Services qualify as “related and subsidiary” if the services are furnished by the DISC or a related supplier, and if the services are related or subsidiary in some way to the sale or lease of export property, and are the type of services that are customarily and usually furnished in connection with sale of the export property.  Typical examples of related and subsidiary services would be warranty, maintenance, repair or installation services.

In addition to the “related and subsidiary services” discussed above, engineering and architectural services on construction projects (whether or not the projects are built) outside the United States.   In order for the project to be considered “construction” for purposes of receiving DISC treatment, the project must include the erection, expansion or repair of a new or existing building or other structure including roads, dams, bridges, tunnels, canals, railroads, railroad tracks and pipelines.

Engineering services eligible for DISC treatment  include feasibility studies and other professional services requiring engineering education, training and experience, and the application of specialized knowledge of mathematical, physical or engineering sciences.  Examples of engineering services include consultation, investigation, evaluation, planning, design, or supervision of the construction project.

Architectural services eligible for DISC treatment include professional services such as consultation, planning, aesthetic and structural design, drawings and specifications, or oversight of compliance with plans, specifications and design.

If you export products and services and are not yet taking advantage of the tax savings afforded by use of a domestic international sales corporation, give me a call or email to discuss at Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.   If you and your spouse are forming an LLC, you have the choice of treating your LLC as a partnership, a corporation or a sole proprietorship for federal income tax purposes.  If you and your spouse each own LLC membership units, the LLC must be taxed as a partnership unless you elect to treat it as a corporation.  If only one of you own LLC membership units, you must treat the LLC as a sole proprietorship unless you elect to treat it as a corporation.  If the LLC is treated as a partnership, you must file a partnership tax return on IRS Form 1065 and include a Schedule K-1 for yourself and your spouse to report the partnership income allocated to each of your membership interests.  If the LLC is treated as a sole proprietorship, you do not need to file a partnership tax return and only need to attach a Schedule C to your IRS Form 1040 to report the income generated by the LLC.  Many spouses opt to have the LLC owned by one spouse and treated as a sole proprietorship to avoid the necessity of filing the partnership return.  Call or email me at 937-223-1130 or Jsenney@pselaw.com if you have any questions about the best way to set up your LLC for tax purposes.

Wednesday, February 13, 2013

Internet Sales Can Qualify as DISC Export Property

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 In previous Blogs we talked about the benefits of setting up a domestic international sales corporation (“DISC”).   By using a DISC, domestic manufacturers who export products are able to reduce their overall federal income tax rate on export income by nearly 20 percentage points (from the 39.6% top ordinary income tax rate to the 20% qualified dividend rate).   What many taxpayers do not know is that the benefits of using a DISC extend not just to sale of physical products that are shipped outside the US, but also to sale of certain services and to sale of computer programs, information and other data that are transmitted out of the US electronically.

Under the Internal Revenue Code and the Treasury Regulations, "export property" is defined to mean property:

1. that is manufactured, produced, grown or extracted in the United States by a person other than a DISC;

2. that is held primarily for sale, lease, or rental in the ordinary course of trade or business for direct use, consumption, or disposition outside the United States; and

3. where not more than 50% of the fair market value of the product is attributable to parts, components or other items imported into the United States.

The IRS has treated export sale of domestically produced computer software programs as export property for DISC purposes for many years.   Treasury Regulations were eventually issued to address some of the questions that arose in this area.  Under the Treasury Regulations, the key inquiries are whether the particular software program, data or information is  “export property” and whether the software is for use or consumption outside the United States.    As defined and described in the Treasury Regulations, many different types of electronically-transmitted computer programs, information or data can be export property, including electronically-transmitted computer software programs, films, books, tapes, records, or similar musical, artistic or literary reproductions.    However, the definition of export property does not include patents, inventions, models, decisions, formulas or processes, copyrights, goodwill, trademarks, and other like intellectual property.

In the next blog, we'll look at the types of services that can be included within the definition of export property.  If you have any questions or comments about how to set-up a DISC, or about what type of products or services are within the meaning of export property, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.    Ohio recently amended its corporate dissolution statute. If you are owed money by a corporation that is dissolving, you can be adversely impacted if you do not act in a timely manner.  The dissolving corporation is now required to give notice of dissolution to each known creditor and to each person that has a claim against the dissolving corporation. The notice will advise that you must file a claim for what you are owed and a deadline for filing the claim must be fixed. The deadline must be at least 60 days following the date the notice is given. The claim must be in writing and must “identify the claimant and contain sufficient information to reasonably inform the corporation of the substance of the claim.”  IF YOU DO NOT FILE A CLAIM BY THE DEADLINE THEN ANY CLAIM YOU HAVE AGAINST THE DISSOLVING CORPORATION IS BARRED.  This is not something you can set aside until later. Failure to file a timely claim is fatal.  if you have a claim against a corporation and receive a Notice of Dissolution, you need counsel to advice on the technicalities of the new statute or your claim may be barred.  Please contact one of our Business Attorneys at 937-223-1130 for guidance on these matters.

Tuesday, February 12, 2013

Built-In Gain Tax "Recognition Period" only 5 years Thru 2013

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If you have an “S” corporation that used to be a “C” corporation and you are thinking of selling all or part of your business assets, 2013 would be a real good time to close the deal.

A sale of assets by an “S” corporation that used to be a “C” corporation during the “recognition period” is subject to a built-in-gains tax.  A built-in-gain tax is imposed on the corporation, at the highest corporate tax rate, on the appreciation in asset value that existed on the date the corporation became an “S” corporation.  The shareholders may then be subject to a second tax on distribution of the sales proceeds.
This “double tax” created by imposition of the built-in gain rules can be eliminated if the corporation holds and sells assets only AFTER the recognition period has expired.   But the longer the recognition period is, the tougher that is to do.

The recognition period used to be 10 years.  This can be an awfully long time to hold assets.  Several years ago Congress recognized this and reduced the recognition period temporarily to 5 years.  The recognition period was set to return to a 10 year period after 2012.   But the recently enacted 2012 Tax Relief Act extended the 5 year recognition period to cover all sales that take place through the end of 2013.   That means you can sell assets in 2013 that you have held at least 5 years without triggering built-in gains tax.
If you have any questions about built-in-gains tax please call or email me at 937-223-1130 or Jsenney@pselaw.com

Don’t forget, the new special additional 3.8% Medicare Tax imposed on net investment income is subject to the Estimated Income Tax Provisions.  This 3.8% Medicare tax is one of the taxes that is included in computing the penalty for underpayment of estimated tax under Code section 6654(f).   Taxpayers who expect to be subject to this 3.8% Medicare tax need to take this tax into account when calculating estimated tax payments.  If you have questions concerning the 3.8% medicare tax and whether you are subject to such tax, please call or email me at 937-223-1130 or Jsenney@pselaw.com.