IC-DISCS: Producer’s Loans and Aggregate Deferral Limits

This is the last in a series of articles describing a combination of resources available to small and medium sized US-based businesses exporting to foreign markets, through a range of US tax incentives and governmental financial and insurance products.

Last week, we discussed IC-DISC tax benefits for C-corporations and pass-through entities, and I will conclude by addressing “Producer’s Loans” and deferral limits.

Congress created an additional benefit to forming IC-DISCs in its taxation of the loans, termed “Producer’s Loans”, which are issued by IC-DISCs. A Producer’s Loan is the IC-DISC’s retained income, which may be loaned back to the affiliated exporting company. The exporting company may not only use this loan without actually distributing it, but may also deduct the interest paid for the Producer’s Loan as IC-DISC qualified export receipts. The exporting company affiliated with an IC-DISC, either as a parent or under common ownership, may decrease its cost of capital by borrowing against the retained, untaxed earnings of the IC-DISC by way of the Producer’s Loan. The interest paid back to the IC-DISC will receive the same benefits as the other qualified export receipts allocated to it, thereby providing the deferral and distribution benefits described above.

Finally, while the US tax code generally restricts the qualified export receipts eligible for IC-DISC tax exemption and deferral to an aggregate of $10,000,000, the IC-DISC may increase that limit through other types of export related income. These additional categories of income include the sale of export related receivables by the exporter to the IC-DISC and promotional activities the IC-DISC may perform on the exporter’s behalf on a cost plus 10% basis.

This series described the U.S. sponsored tax benefits available for U.S. exporters to defer and reduce US taxes on their export related income by forming an IC-DISC. I addressed ways to maximize the gains available through proper legal structuring and accounting of export transactions through the IC-DISC, which and benefit small and medium businesses by producing more available capital and higher returns to shareholders.

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