“Can we still calculate an IC-DISC commission when our supplier company is experiencing a net loss?” Every year this question seems to surface during year-end tax planning discussions. While most people are unfamiliar with the ins and outs of an IC-DISC, many practitioners are generally aware of the prohibition of an IC-DISC causing a loss to its related supplier. Although each client scenario is unique, the simple answer to this question is that there is nothing in the Code or Treasury Regulations that prevents taking a commission expense in a net loss year.
The IC-DISC Audit Guide states that when calculating an IC-DISC commission, “If either the 4 percent qualified export receipts (QER) method or the 50 percent combined taxable income (CTI) method is used, it is subject to a ‘no loss’ rule.” A loss to a supplier occurs when the taxable income of the IC-DISC exceeds the CTI of the related supplier and the IC-DISC. CTI is calculated using the supplier’s gross receipts from the sale of export property less the supplier’s expenses and the IC-DISC’s expenses related to that transaction.
Without getting too in depth with the math, it is important to clarify the application of the no-loss rule. This rule is invoked upon each individual sale transaction. Therefore, by running a transaction-by-transaction (TxT) calculation, either of these methods may be applied, to the extent it does not cause a loss to that specific, individual sale.
In summary, the no-loss rule is not measured by looking at the supplier’s operation as a whole, but rather each individual transaction. In most cases, the supplier company will have many export transactions that can be identified and amassed that do not cause a loss, and are therefore not subject to the no-loss rule. Subsequently, it is certainly possible to calculate a significant IC-DISC commission deduction for a loss year.