IC-DISC Qualification Case Study: Aerospace Engine Overhaul

Example of Qualified Manufacturing Activities for IC-DISC: Aerospace Engine Overhaul

A common activity of an MRO (Maintenance, Repair, and Overhaul) company is the overhaul of aerospace engines, which qualifies as manufacturing under the IC-DISC (Interest Charge Domestic International Sales Corporation) program. Here’s how this activity fits the criteria:

Qualified Manufacturing Activity: Aerospace Engine Overhaul

Activity Description:

  • The MRO company specializes in overhauling turbine engines used in commercial and military aircraft. This process involves the complete disassembly of engines, inspection and testing of individual components, repair or replacement of defective parts, and reassembly of the engine to restore it to like-new condition. In some cases, the engines undergo upgrades to improve fuel efficiency or performance, and they are then tested to meet original specifications.

Why It Qualifies as Manufacturing under the IC-DISC Program:

  • Substantial Transformation: The overhaul of aerospace engines involves substantial transformation of parts and materials. The company takes used or worn-out engines and completely refurbishes them, including repairing, replacing, and reassembling components. This process transforms the engine back into a fully functional and operational piece of machinery, which is considered manufacturing under IRS guidelines.
  • Export-Related Activity: The company exports overhauled aerospace engines to foreign markets, including countries in Europe and Asia. Under the IC-DISC program, manufacturing activities that involve the production of export goods—such as overhauled engines—qualify for tax benefits if the products are sold to foreign customers.
  • Eligible Manufacturing Process: The overhaul process includes tasks such as:
    • Disassembly of the engine.
    • Inspection of parts for wear and tear.
    • Repair and replacement of parts (e.g., turbine blades, compressors).
    • Testing to ensure compliance with industry standards.
    • Reassembly of the engine with repaired and replaced parts.
  • Each of these activities constitutes part of the manufacturing process as the engine is being modified and improved to meet performance and safety standards.

Tax Benefits Under the IC-DISC Program:

  • By designating the export sales of overhauled engines as part of the company’s IC-DISC agreement, the MRO company can shift income to the IC-DISC. This allows the company to deduct the commission paid to the IC-DISC, reducing its taxable income.
  • The commission income earned by the IC-DISC is subject to lower taxation when distributed as qualified dividends (taxed at 20% compared to the regular 37% rate for ordinary income).

Example of Tax Impact:

If the MRO company earns $25 million from exporting overhauled engines, the income could be shifted to the IC-DISC under a commission arrangement. Assuming a commission of 4% ($1MM), the company could reduce its taxable income by that amount, lowering its overall tax liability.

Without IC-DISC:

  • The $1MM would be taxed at the standard 37% rate:
    $1MM × 37% = $370,000 in taxes.

With IC-DISC:

  • The $1MM is deducted from the company’s income, reducing the tax burden.
  • The IC-DISC pays no federal tax and distributes the commission as a qualified dividend at the 20% tax rate:
    $1MM × 20% = $200,000 in taxes.

Total Tax Savings:

  • $370,000 (without IC-DISC)
  • $200,000 (with IC-DISC)
  • Total Savings = $170,000

Conclusion:

By engaging in aerospace engine overhauls and exporting the refurbished engines, this MRO company meets the criteria for the IC-DISC program. The substantial manufacturing process of overhauling engines qualifies as manufacturing under IC-DISC guidelines, enabling the company to benefit from significant tax savings and enhanced cash flow while remaining compliant with U.S. tax law.

This example illustrates how MRO businesses involved in manufacturing and exporting can use the IC-DISC program to reduce tax liabilities, enhancing profitability and supporting business growth.

For more information on IC-DISC for the MRO business, or to discuss your specific business, reach out for a quick conversation: https://tglobaltax.com/contact/