Boost Your IC-DISC Tax Savings With A/R Factoring

Boost Your IC-DISC Tax Savings With A/R Factoring

Factoring accounts receivable (A/R) through an IC-DISC can yield significant additional tax savings for companies engaged in exporting. Here’s how the process generally works:

  1. **Qualified Export Revenue**: The tax code defines qualified export revenue to include interest earned on obligations classified as qualified export assets. A/R resulting from qualified export sales falls under this category.
  2. **A/R Factoring Agreement**: The exporter and the IC-DISC enter into an agreement where the exporter sells its A/R to the IC-DISC at a discount. This discount is recognized as interest income by the IC-DISC.
  3. **Tax Treatment**: Income earned through the factoring arrangement is treated as interest income. The exporter can deduct the loss resulting from the sale of its A/R.
  4. **Tax Savings**: By factoring A/R through an IC-DISC, the IC-DISC’s qualified export revenue increases, which isn’t subject to federal tax. This reduces the income of the exporter, resulting in tax savings due to the difference in tax rates between ordinary deductions for the exporter and qualified dividend income eventually paid out through the IC-DISC.
  5. **Tax Deferral**: Depending on the volume of export sales, factoring A/R can lead to significant tax deferral. This tax deferral in AR-factoring is largely dependent on the operating company being an accrual basis taxpayer, as opposed to cash.
  6. **IRS Position**: The IRS supports the classification of these transactions, and the positions described are backed by a revenue ruling. It’s crucial to maintain transfer pricing documentation supporting the discount rate used in the factoring arrangement, which should be periodically reviewed.

Overall, factoring A/R through an IC-DISC offers a tax-efficient strategy for exporters to optimize their tax position and potentially defer taxes, provided they comply with relevant tax regulations and maintain appropriate documentation.

For more information on IC-DISC or other export tax related services, please don’t hesitate to reach out: mmiller@tglobaltax.com .