Byte your Bill: How Software Companies Can Qualify for the IC-DISC Commission Deduction

As economies around the globe increasingly prioritize technology and digital intellectual property, there is now more demand for software in the worldwide market than ever before. Companies continually seek innovative software solutions to streamline operations, enhance productivity, and stay competitive in a rapidly evolving digital landscape. This growing appetite for technology presents significant opportunities for U.S. software companies to expand their reach internationally. By exporting their software solutions to other countries, U.S. firms can tap into new markets, diversify their revenue streams, and capitalize on the global demand for cutting-edge technology.

Software vendors in the United States will be pleased to know that in addition to generating new revenue for their firm, sales to foreign customers may also qualify for an IC-DISC commission deduction. Originally, the IC-DISC deduction was an export incentive for manufacturing companies, aiming to reward businesses with employees in the U.S. that generate revenue from overseas sources. The eligibility of software sales as qualified export receipt (QER) was a contentious issue until the 1998 amendment to IRC Section 927(a)(2)(B) specifically included language addressing sales of software under the definition of export property.

While this indicates that software may qualify as export property, it does not definitively state the rules that would disqualify certain sales of software. Treasury Regulation 1.861-18 goes into further detail on this matter, breaking down sales of software as either “copyright rights” or “copyright articles”. Copyright articles are considered QERs, while copyright rights are strictly excluded.

A copyright article is defined as “a copy of a computer program from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The copy of the program may be fixed in the magnetic medium of a floppy disk, or in the main memory or hard drive of a computer, or in any other medium.”

A copyright right, on the other hand, is a sale of intellectual property (IP) in which the purchaser has the right to reproduce, distribute, create derivatives of or make public the IP being purchased. Further clarification of this definition can be found in the court case Microsoft Corp. v. Commission, 115 T.C. 228 (2000). The ruling states: “Mass-marketed software without reproduction rights may qualify as export property under the DISC rules, similar to a copyrighted book.”

Essentially, if the purchaser is obtaining a copy of the IP without the rights to reproduce it, it can qualify as an export asset. It’s important to note that all export sales that are considered copyright articles must also pass the standard Manufacturer, Foreign Content and Destination tests to be eligible for an IC-DISC commission.

Considering the nature of your business is crucial to determine if your firm could qualify for an IC-DISC commission. McGuire Sponsel has decades of experience servicing IC-DISC clients, offering expert guidance and comprehensive support to maximize their tax savings and enhance their export activities.

If you would like to discuss further or have any questions about whether your client’s business qualifies for an IC-DISC commission, please do not hesitate to contact our Global Business Services team.