McGuire Sponsel has discussed the IC-DISCs year-end planning topics with clients in our webinars and news articles. To summarize, once an IC-DISC is established by making the proper IC-DISC election, a company may begin claiming the IC-DISC benefit. The IRS states that a company’s export sales may qualify for the IC-DISC if the exported property can pass a series of tests.
Three tests determine if an asset is a qualified export sale:
1. Manufacturer Test
The export property must be manufactured, produced, grown or extracted in the United States. This applies to both manufacturers and distributors. A “manufacturing” safe harbor test can be used to determine whether the labor and factory burden is at least 20 percent of the total cost of goods sold. This burden must constitute more than mere repackaging and result in a substantial transformation of the property in the United States. If goods are re-imported back to the United States for additional manufacturing or processing, previous manufacturing efforts are disregarded when considering safe harbor.
2. Foreign Content Test
This is a fairly straightforward test. No more than 50 percent of the fair market value (FMV) of the export property can be attributable to imported content. Take this example:
- The sale price of the finished product: $100
- Cost of imported material in the product: $49
- The foreign content test is passed
3. Destination Test
Finally, goods must pass the destination test:
- The product must be delivered from the United States to a purchaser outside the United States by means of a ship, aircraft or another delivery vehicle.
- If delivered within the United States to a purchaser, the property needs to be ultimately consumed outside the United States within one year of sale.
- If delivered within the United States to a carrier or freight, the property needs to be forwarded for ultimate delivery outside the United States to the purchaser.
Points two and three above assume no further manufacturing occurs in the United States.
In our next article, we’ll discuss ways to maximize your IC-DISC benefit. Is your company missing out on valuable opportunities? Contact your McGuire Sponsel partner to see what we can do for you.