In the world of accounting, the close of a company’s tax year inevitably sends people into a scramble. The calculation of the IC-DISC commission expense seems to add to the chaos; however, being familiar with the IC-DISC’s 60-day rule and 90-day rule could alleviate some of the tax season stress. Understanding how to apply these rules can save taxpayers and CPAs from the headache of adding another to-do list item in the middle of tax season.
The 60-day rule applies to the timing of a company’s commission expense. Every company that plans to benefit from an IC-DISC commission must calculate, or reasonably estimate, and pay at least half of the IC-DISC commission within the first 60 days following the close of the IC-DISC’s tax year. Code § 1.994-1(e)(3)(i) Initial payment of transfer price or commission states, “The amount of a transfer price (or reasonable estimate thereof) actually charged by a related supplier to a DISC, or a sales commission (or reasonable estimate thereof) actually charged by a DISC to a related supplier, in a transaction to which section 994 applies must be paid no later than 60 days following the close of the taxable year of the DISC during which the transaction occurred.” Two points to keep in mind for the 60-day rule include understanding that the reasonable estimate of the commission expense is sufficient and that estimates need only be 50 percent of the final commission that is determined later in the year. The commission expense is what must be paid into the IC-DISC bank account during this 60-day window.
The other rule to consider is the 90-day rule, which allows a company to make adjustments to transfer price or commission amounts that were overstated or understated. Code §1.994-1(e)(5) Procedure for adjustments to transfer price or commission states, “If the account receivable is paid within 90 days after the date it is established (or deemed established), then as of the end of the taxable year of the DISC in which the transaction occurred which gave rise to the indebtedness, the account receivable shall be treated as an asset… and thus as a qualified export asset.” In layman’s terms, this means that a company has 90 days to adjust a commission payment from the time the necessary adjustment was discovered. Therefore, if the commission expense was calculated based on preliminary numbers within the first 60-days, the company still has time to recalculate the commission expense once final numbers are determined.
McGuire Sponsel believes these two rules give taxpayers options as to the timing of calculating and paying the IC-DISC commission expenses.
Although many of the companies we work with prefer to finalize the IC-DISC commission within the 60-day window, it is important to point out that these rules could benefit clients that plan to extend their returns.