The IC-DISC successfully survived the Tax Cuts and Jobs Act of 2017 (TCJA) to live another day. The Senate version of the tax reform bill did, for a brief time, have the IC-DISC on the chopping block. However, its repeal was not included in the final version, and the IC-DISC regime remains intact in the final bill as enacted. While this is great news for companies that have taken advantage of the IC-DISC in the past, other provisions of the new sweeping tax reform may still impact your IC-DISC starting in tax year 2018. Therefore, it’s very important to include the IC-DISC when you consider the impact of the overall tax reform changes to your company.
For those that may not be familiar with the IC-DISC, it is an export incentive for U.S. domestic companies whereby income related to export sales can be taxed at the lower capital gain rate of 20% (23.8% including net investment income tax) as opposed to ordinary rates of 39.6% (flow-through entities) or 35% (C corporations). The biggest impact of the TCJA on the IC-DISC going forward is the reduction of the top ordinary rates to 37% for flow-through entities and 21% for C corporations. The 20% capital gain and qualified dividend rate remains the same under the TCJA. This has therefore reduced the rate spread but clearly has not eliminated it, especially for flow-through entities. However, many of the complexities added by the TCJA could still further impact your IC-DISC benefit.
In addition to a slightly lower top tax rate, flow-through entities can also potentially avail themselves of a new 20% deduction of their qualifying business income under new IRC § 199A. For those businesses that can take this new deduction, this lowers the top tax rate available for IC-DISC benefit to 29.6%, causing the total benefit to possibly be reduced by 10%. This could be somewhat offset, though, by companies that were formerly taking advantage of the domestic production activity deduction (DPAD) as it has been repealed by TCJA. The new limitation on interest expense deduction to 30% of EBITDA added by TCJA must also be considered for purposes of its impact on the overall IC-DISC benefit.
While the majority of the C corporation-related changes made by the TCJA are permanent, most of the provisions related to individuals and pass-through entities are designed to sunset after 2025. Therefore, even if the new provisions substantially lower your IC-DISC benefit today, it may be beneficial to keep your IC-DISC in place, possibly taking it dormant until a future year if/when the benefit returns.
It is now more important than ever to take a careful look and analyze your IC-DISC benefit. A good time to do so is while finalizing your benefit for 2017. If your company has not yet taken advantage of an IC-DISC, it certainly is still a viable tax planning idea for U.S. exporters. Please feel free to contact a member of the Clark Schaefer Hackett international services group, or contact me at [email protected], if you would like assistance in analyzing the impact of the TCJA on your IC-DISC, as well as discuss additional ways to maximize the benefit.