ICDISC a boon for exporters

May 27, 2011
| By Pete Daly |
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An IC-DISC tax return classification is helping 5 Star Parts in Wyoming save money, which allows owner Bredell Herrer to invest more in his business: exporting used semi-tractor trucks and new parts for them to Africa.

An IC-DISC classification is helping many other West Michigan exporters, too.

Jerry Jonckheere of Plante & Moran, which helped Herrer set up his IC-DISC, said it is “the most beneficial” tax strategy available to qualified exporters. Although the IC-DISC has been around since 1971, accounting firms are seeing it gain a lot of popularity, according to Jonckheere, a partner in Plante & Moran’s international tax services division.

With the weaker U.S. dollar compared to other currencies around the world, exports from the U.S. are on the upswing, and Jonckheere said many companies now have annual exports worth a million dollars or more. The IC-DISC tax structure works best if a business has at least $1 million in exports, but it also works well even if total export sales are under $1 million, as long as those exports are very profitable.

“Right now, within Plante & Moran, we probably have 50 companies with DISCs,” he said. This was the first export incentive for smaller businesses when enacted in the Nixon era, according to Jonckheere.

The “domestic international sales corporation,” or DISC, serves as an export agent for its company and is paid a commission, but the DISC is not a taxable entity. On exports with a value of $1 million, Jonckheere said the exporter’s DISC is allowed to take a commission of $40,000. That commission is deducted by the corporation and later paid to the company shareholders in the form of qualified dividends, which are taxed at about half the rate the shareholders would have paid on the money as corporate earnings.

“So, just in this example of a million dollars in foreign sales, the shareholders save $8,000 in taxes,” said Jonckheere.

The IC part of the equation — the interest charge — further increases the benefit of the IC-DISC. Shareholders can delay receiving the dividends for a year (sometimes, more than one year), but the IRS charges interest on the amount that would have been due that year.

The good news is interest rates are at historic lows. In mid-May, according to Jonckheere, that interest rate charged by the IRS was one half of 1 percent.

The applicable federal rate used to determine interest rates charged by the IRS changes each month, and the rate charged for the year is the average over the year. In May, the AFR was 0.53 percent, noted Jonckheere, but earlier this year, that rate was as low as one quarter of 1 percent.

“We are in some pretty extraordinary times with low interest rates,” said Jonckheere. So the IC-DISC is a method of delaying income to a following year in which the total taxable amount may be lower, and the interest charged on that delayed taxation can best be described as minimal.

The 5 Star Parts company ended calendar year 2010 with sales of just over $11 million, according to Doug Luyk, who serves the company as a business and technology consultant.

Bredell Herrer, a native of Zimbabwe, came to the U.S. in 2003 and the following year started 5 Star Parts. The company now employs seven including Bredell, and he is planning to hire another individual to specialize in procurement of used earthmoving equipment for export to Africa, along with trucks and parts.

Herrer said there is a very big market for used trucks in Africa from the equator south, where everything is done by road. Air freight is not the greatest there, he said, adding that the railway system is either non-existent or in very poor shape. Most railroads in Africa are owned by the national governments, he added.

Herrer said he exports used semi-tractors and new parts for them to the African nations of Zimbabwe, Mozambique, Zambia, South Africa, Namibia, Malawi and the Democratic Republic of Congo. “And a customer in Norway,” he added.

Those African countries are heavily dependent on truck transport, said Herrer, because much food and other goods are imported into the countries, and mining is a key activity there, with the mines constantly shipping their raw production to ports for shipment out of Africa. The trucks return to the mines with needed equipment and supplies.

Truck transportation, by and large, keeps the African economies alive, he said, and the greatest demand is for American trucks versus European. One reason for that is the cheaper American dollar compared to the euro. Another reason is that European trucks tend to be more high-tech, while American trucks are simpler. “Africa likes simple,” said Herrer.

U.S. heavy trucks also tend to be in good condition, said Herrer, because the ever-present threat of lawsuits in the U.S. puts a premium on good, regular maintenance.

After five or six years, said Herrer, an American semi-tractor “might have 700,000 or 800,000 miles, but they are still nearly as good as new. And they still go for another 10 or 15 years in Africa.”

Many of the trucks Herrer puts on ships to Africa he buys from two of the largest truck rental companies, Ryder and Penske. His employees also go to auctions of fleets.

“We’ll get trucks wherever we can find them, as long as they meet our specs and our price,” said Luyk.

When the economy soured in 2008, a lot of used semi-tractors went on the market due to bankruptcies of trucking companies, especially the smaller ones. Then the market for used semis turned over practically overnight, according to Herrer, when the trucking companies that survived “just kept their old trucks going” after banks seemingly stopped loaning money to small businesses.

“Then the leasing companies re-leased their old trucks” to their customers, added Herrer.

That, and the economic downturn starting at the consumer level, led to an overall drop in heavy truck production that Industry Week reported was an estimated 160,000 units sold in 2009, compared to 205,000 in 2008, 212,000 in 2007 and 377,000 in 2006.

“Truckers felt it first before we even knew about a bad economy coming,” said Herrer.

Now 5 Star is finding used trucks and heavy earthmoving equipment throughout the U.S., and with the recession gradually withdrawing, the company’s exports to Africa are growing. An IC-DISC, said Herrer, gives him a little breathing room in his cash flow to recruit a seasoned expert in earthmovers to add to his employee roster.

“If we were stuck with the full federal income tax liability, there’s no way we’d be able to even contemplate hiring right now,” said Luyk.

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