As any reader of The Farm News is already aware, California produces a significant portion of the worldwide production for certain crops. As recently as 2012, eighty percent (80%) of the world's production of almonds, and ninety nine (99%) of the United States' production of pistachios, were produced here in California.
For farmers who produce crops that are largely exported, there has been a significant tax reduction strategy through a federal subsidy for exports, and many farmers are not taking advantage of this strategy. Specifically, the Internal Revenue Code provides a significant tax benefit for the producers of exported goods in the form of an Interest Charge Domestic International Sales Corporation, or "IC-DISC." While the IC-DISC is essentially a federal subsidy for exports, it has not been challenged by the World Trade Organization and thus continues to be a viable tax reduction strategy. In fact, for clients whose exported portion of their harvest is equal to or greater than $1,000,000 annually, I advise them that they should strongly consider an IC-DISC; otherwise they may be "leaving money on the table."
An IC-DISC is relatively easy to form, though does require the assistance of a professional who understands the challenges unique to farming operations in California. The IC-DISC is simply a new corporation formed by the farmer that makes an election to be taxed as an IC-DISC. This corporation will serve as the broker to the exporter of the crops. The farmer then enters into a commission agreement with the IC-DISC corporation, according to specific guidelines established by the IRS. It typically requires an attorney and a certified public accountant that are familiar with the requirements to establish such an arrangement given the peculiarities of California law.
The net result of this arrangement is to carve out a portion of the income received from exported goods through the commission agreement, and effectively causing that income to be taxed in a preferred manner with respect to the farmer, and the IC-DISC. The farmer harvesting the crops pays a commission to the IC-DISC, and deducts the amount of that commission from his other farming income, thus the amount of the commission is untaxed to the farmer. The commission that is received by the IC-DISC is not subject to federal income tax and is then distributed to the IC-DISC owners, typically as a qualified dividend. The rate that the dividend is taxed at is a maximum of twenty percent (20%); the net effect of this arrangement can reduce the tax liability from your farming operations by up to twenty percent (20%).
Therefore, if a significant portion of your harvested crops are exported, you should consult with a qualified tax professional to determine if the formation of an IC-DISC is appropriate for your farming operations. It may be an effective means of hedging the effect of these tough drought years.
This article was published in the March 2014 issue of The Farm News.
This article was published in the March 2014 issue of The Farm News. - See more at: http://www.youngwooldridge.com/blog/ic-disc-interest-charge-domestic-international-sales-corporation/#sthash.w43Xs4QN.dpuf