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News Flash: Proposed Changes to
IC-DISC Dividend Calculation
The mid-term election of November 7 may witness changes to the complexion of the Congress. Those changes may affect your manufacturing or distribution business. Some proposed changes might affect tax laws, and you should be aware of
them.
One proposed change would eliminate certain tax benefits provided to Domestic International Sales Corporations (DISCs)--it would disqualify dividend distributions from the current capital gain rate and subject them to tax as ordinary
income up to 35%.
The bill as proposed would not affect the capital gain rate on dividends paid before September 29, 2006. However, the tax rate and changes to it greatly depend on the terms of the individual DISC and when, according to those terms,
dividends are distributed. If dividends are distributed annually, you may wish to discuss the ramifications with your tax advisor immediately to see how your DISC may be affected. If dividends are distributed throughout the year, the need
to discuss the changes with your advisor may be less urgent. In any event, you may have an alternative to the DISC in the form of the Extraterritorial Income Exclusion.
It is, at the time of this writing, not clear as to when Congress will address these changes. The proposed legislation still has to fully traverse a maze of requirements in both houses before it can become law.
If you are considering, have considered, or have already established an IC-DISC, please phone your tax advisor to discuss how the proposed legislation may affect you the alternatives open to you.
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