Now that busy season has passed, it is time to circle back with all of the new IC-DISC incorporations to ensure that one critical piece is not overlooked – the IC-DISC bank account. This simple task can often be neglected during the incorporation phase of an IC-DISC with the hustle of completing and filing all of the necessary paperwork. However, the bank account is such a critical step in maintaining the IC-DISC and it is imperative that it is opened using the IC-DISC’s newly acquired employer identification number (EIN) and properly maintained throughout the tax year.
Once the IC-DISC has opened a bank account, it is vital that the IC-DISC capitalization requirements are followed. Code § 1.992-1(d)(1) states that “to qualify as an IC-DISC for a taxable year, a corporation must have, on each day of that taxable year, only one class of stock. The par value (or, in the case of stock without par value, the stated value) of the corporation’s outstanding stock must be on each day of the taxable year at least $2,500.” In order to meet this requirement during the incorporation process, McGuire Sponsel generally sets up IC-DISC clients with 2,500 shares of stock, at $1 a share. Therefore, the $2,500 deposited in the bank account and the 2,500 shares of one class of stock satisfy the IC-DISC’s capitalization requirements. Once established, the $2,500 capitalization floor must be maintained for the life of the IC-DISC.
Within the capitalization requirements, there is a little leeway for “newly formed” IC-DISC corporations that have not yet set up a bank account. Upon incorporation, the IC-DISC election must be made within the 90-day period after the beginning of the taxable year. The capitalization requirements also follow this logic as stated in the IC-DISC audit guide “In the case of a ‘newly formed’ corporation the regulations postpone the capitalization requirement until the last day (day 90) for filing the election. Even if the election is filed before that date it would appear that the newly formed corporation still has the full 90 days in which to issue the $2,500 value of stock to qualify.”
Therefore, it is extremely important that all newly incorporated IC-DISC’s have a bank account set up and $2,500 deposited within the first 90 days. Theoretically, neglecting the bank account could cause an IC-DISC election to be blown and result in losing an entire year of tax benefit. So, with busy season behind us, it is a perfect time to circle back with all of the new IC-DISC clients and ensure that this simple yet critical task is completed.