by Greg Lambrecht, CPAMay 17, 2024

Two Rules to Consider when Timing your IC-DISC Commission

In the accounting world, 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 some of the headaches 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. To benefit from an IC-DISC commission, the supplier and the IC-DISC must complete an estimated calculation and pay such amount within 60 days following the close of the IC-DISC’s tax year. Treas. Reg. 1.994-1(e)(3)(i) provides, “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. The final commission may be determined later in the year. The commission expense is what must be paid (or accrued) into the IC-DISC bank account during this 60-day window.

The other regulation to consider is the 90-day rule. The company is allowed to make adjustments to the transfer price or commission amounts that were overstated or understated and still treat the accrued amount as an export asset. Treas. Reg. §1.994-1(e)(5) provides, “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.”

What does this language mean exactly? It ultimately means three things:

First, prior to filing its final return, an IC-DISC can compute a final calculation and pay (or accrue) an adjustment to the final commission. This final commission may be less than, or greater than, the amount paid within the first 60 days of their yearend. However, it may not exceed 50% of the initial commission. There is no limit to the decrease, if applicable.

Second, it also means that if a return has already been filed, an amended return may be made to correct the commission amount (cf. §1.994-1(e)(3)(iv)(a), Rev. Rul. 82-81 and TAM 872003). The same 50% threshold applies.

Finally, if the initial commission is accrued and paid within 90 days of such accrual, the receivable (assuming an increase in commission) may be included as an export asset for the year to which the commission relates. This may be important for the IC-DISC to continue meeting its asset percentage requirement.

At McGuire Sponsel, we firmly believe that understanding these two rules can provide taxpayers with valuable options for the timing of calculating and paying the IC-DISC commission expenses. Our expertise in this area can help you navigate these rules effectively, maximizing your tax benefits and minimizing your tax season stress.

Although some of our clients prefer to finalize their IC-DISC commission within the 60-day window, it is essential to understand the benefits of being able to make adjustments subsequent to this window. Such adjustments would include any additional commission receivable amount as an export asset if paid within 90 days of the adjustment.

Contact McGuire Sponsel’s Global Business Services team for any questions on IC-DISC or other international tax issues.

Greg Lambrecht, CPA is a Principal in the firm’s Global Business Services practice and advises clients on international tax matters including understanding the consequences and opportunities associated with global tax planning decisions. He also assists clients in managing increasingly complex compliance requirements of companies with international operations.

Lambrecht joins McGuire Sponsel from the Big Four with over a decade of experience leading complex international tax projects for Fortune 150 clients and over 20 years of total experience in international tax.

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