Once you are sure that your business qualifies for an IC-DISC, you simultaneously create and enter into a written agreement with the IC-DISC. You’ll continue to sell your goods as you normally do, and pay tax-deductible commissions to the IC-DISC. You can deduct these payments in full, and the dividends from the IC-DISC are taxed at the qualified dividend rate – lower than rates for ordinary income, resulting in more money back in your pocket.
There are some additional steps to be taken to ensure proper optimization and implementation. For instance, alternatives need to be considered based on your type of business entity. If your company is an S-corporation, partnership or limited liability company, your IC-DISC can be established as a subsidiary. Any dividends will qualify for the 20 percent tax rate. If your company is a C-corporation, however, the entity has to be created as a sister corporation to avoid being taxed at the normal corporate rate – which wouldn’t offer a tax benefit.
Because the analytics portion of IC-DISC implementation can get complicated, there are numerous benefits to discussing this with a knowledgeable advisor.
For a more in-depth look at this topic, see The ABCs of an IC-DISC, a CSH lite paper.
Further resources for understanding IC-DISC:
