For all of the following questions, USACo is a domestic manufacturing corporation that exports a portion of its products; USACo is an S-Corporation wholly owned by John Client (John pays the tax on the income of USACo). John Client has created an IC-DISC, of which he is also the sole owner. Assume the regular income tax rate is 40%; the dividends tax rate is 20%; the current market rate for 52-week T-bills is 1%.
1. What annual income tax return must be filed by the IC-DISC each year to report its income?
2. What is the minimum par value of stock for an IC-DISC?
3. Who is subject to tax on the income of an IC-DISC? Is the IC-DISC itself subject to income tax? Is John Client subject to income tax? Explain.
4. Discuss the three main requirements for qualifying export property.
5. USACo has $2,500,000 of qualified export sales in 2016. Total direct and indirect costs related to exports are $2,200,000. Answer all 3 parts below; show your work;
a. Compute the 2016 IC-DISC commission using the 4% of qualified export receipts method.
b. Compute the 2016 IC-DISC commission using the 50 percent of combined taxable income method.
c. Compute the maximum overall tax savings for 2016 from the use of an IC-DISC.
6. USACo has two product lines – Widgets and Fidgets. USACo wants to maximize the IC-DISC commission in 2016 by grouping export sales by product line. 2016 data for exports by product line is as follows: Widgets Fidgets $1,000,000 Gross receipts $2,000,000 Gross receipts ($950,000) Direct & indirect costs ($1,700,000) Direct & indirect costs $50,000 Combined taxable income $300,000 Combined taxable income Answer both parts below; show your work;
a. Compute the 2016 IC-DISC commission using grouping.
b. Compute the overall tax savings for 2016 from the use of an IC-DISC.
7. At the end of 2016, $25,000 of IC-DISC income was neither actually distributed nor deemed distributed. Answer the following questions;
a. What Form must John Client file regarding the interest due on deferred IC-DISC income?
b. Compute the amount of interest that John Client will owe in regards to the deferred IC-DISC income.
c. Are estimated tax payments required during the course of the year for the interest owed in regards to this?