What Is Form 8404 and Who Is Required to File It?

Form 8404, “Interest Charge on DISC-Related Deferred Tax Liability,” is an Internal Revenue Service (IRS) document used by certain taxpayers to figure and report an annual interest payment. This interest is owed to the government and arises from a tax benefit related to export sales. The form is used to calculate the tax that has been postponed on this deferred income and then apply a prescribed interest rate to that amount, ensuring a condition of the tax incentive is met.

Determining the Filing Requirement

The obligation to file Form 8404 rests with the shareholders of an Interest Charge Domestic International Sales Corporation (IC-DISC). An IC-DISC is a U.S. corporation established to function as a sales agent for export property, providing tax advantages to its owners. The primary benefit is the ability to defer income tax on a portion of the profits generated from these export sales, which creates a “deferred tax liability” for the shareholder.

A shareholder must file Form 8404 if the IC-DISC reports deferred income to them, which is done on Schedule K of Form 1120-IC-DISC. Furthermore, the shareholder must file if including this deferred income in their regular taxable income would cause their tax liability to increase. If a shareholder benefits from the tax deferral offered by the IC-DISC structure, they are required to calculate and pay this interest charge annually.

This interest payment is a component of the IC-DISC rules and functions as a user fee paid to the Treasury for the benefit of the tax deferral. The requirement ensures that while the principal tax amount can be postponed, the government is compensated for the time value of that money.

Completing Form 8404

To complete Form 8404, the filer needs their own taxpayer details and the IC-DISC’s name, address, and its Employer Identification Number (EIN). This information ensures the IRS can match the shareholder’s payment to the correct entity.

The shareholder’s pro rata share of the accumulated IC-DISC income is a necessary figure provided by the IC-DISC. It is found on line 10, Part III, of the Schedule K (Form 1120-IC-DISC). The filer will also need figures from their own primary income tax return, such as a Form 1040 or Form 1120, including the final taxable income and the regular tax liability for the year.

A component for the calculation is the “base period T-bill rate,” which changes annually. The IRS publishes this rate each year in a Revenue Ruling within the Internal Revenue Bulletin. This rate is needed for the final interest calculation and must be the correct one for the tax year in question.

The form’s calculations are performed in two main parts. Part I is for gathering the necessary income and tax figures. The filer enters their taxable income from their main return on line 1 and the deferred DISC income from Schedule K on line 2. The filer then calculates their tax liability twice: once with the deferred income included and once without.

Part II of the form computes the interest charge. The difference between the two tax liability calculations from Part I yields the “DISC-related deferred tax liability” on line 7. This amount is then multiplied by the base period T-bill rate factor, which is entered on line 8. The result on line 9 is the final interest charge that the shareholder must pay.

Filing the Form and Paying the Interest

The due date for filing Form 8404 and paying the interest is the same as the due date for the shareholder’s main federal income tax return. This deadline does not include any extensions granted for the income tax return. For most filers, this means the 15th day of the fourth month after the end of their tax year.

Form 8404 must be filed separately from the shareholder’s income tax return. It should be mailed to the designated IRS service center: Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999. Including the form with a Form 1040 or 1120 can cause processing delays.

Payment of the interest charge must be made by the due date and should not be combined with any other tax payments. The payment should be made out to the “United States Treasury.” To ensure proper credit, the shareholder must write their taxpayer identification number and “Form 8404—Interest Due” on the check or money order.

Failure to pay the interest by the due date will result in the IRS imposing its own interest on the unpaid amount, which will compound daily. The shareholder should retain a complete copy of the filed Form 8404 and proof of payment for their tax records.