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Understanding an IC-DISC: Use this tax incentive to save now

May 7, 2014

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As a member of an international business with substantial exports, you’ve dedicated significant work hours to finding a way to grow your company. This has resulted in long days and even longer nights, with countless calculations to determine where and how you can cut costs and save money. In your travels, there’s a good chance you’ve heard of an Interest Charge Domestic International Sales Corporation, or IC-DISC, and how this exporting incentive results in tax savings. However, what you may not know is that missing out on crucial steps during implementation can lead to unnecessary costs.

With our decades of experience working closely with international businesses, Clark Schaefer Hackett understands how to maximize your tax savings. We’ve helped numerous organizations successfully create an IC-DISC and avoid costly errors. The analytics behind implementation can become detailed, and another set of expert eyes will ensure that the process is as smooth as possible.

An IC-DISC can be a valuable tool
While the name doesn’t sound friendly, its tax breaks certainly are. An IC-DISC is a federal tax incentive for U.S. firms that can drastically boost your profitability, return on investments and fiscal savings. Despite these benefits, too few organizations take advantage or maximize this federal tax savings opportunity.

An IC-DISC isn’t a new concept. This incentive has existed since the early ’70s, and has even outlasted several attempts by detractors in the federal government to shut it down. However, support has increased for the IC-DISC over the last several years. In 2012, President Barack Obama pledged to grow domestic exports in the near future, and the formation of an IC-DISC is now the only tax incentive plan customized for U.S. exporters who produce at least 50 percent of their products stateside.

Because of an IC-DISC’s lack of exposure, your organization may not understand the ins and outs of implementation and best practices, but don’t let these cost savings slip away.

Understanding the details is key to affordable implementation
The first step toward a solution is awareness of the elements behind the formation of an IC-DISC. For starters, you and the IC-DISC enter a written agreement. Then, you sell your goods like normal, and pay tax-deductible commissions to the IC-DISC. Finally, you can deduct these payments in full, and the IC-DISC is taxed at the qualified dividend rate – lower than rates for ordinary income, resulting in more money back in your pocket.

In addition to awareness, forming an IC-DISC brings forth other considerations. To begin, you must ask yourself if all your exports are truly exports. The analytics process can be complicated, and you will have to perform legwork 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, you must be willing to perform the labor and due diligence to ensure everything goes smoothly. While it is best – and most affordable – if these duties are performed in-house, there are numerous benefits of an advisor during the process.

A close relationship with experts is valuable
When you decide to form an IC-DISC, make sure you work closely with Clark Schaefer Hackett – a firm that has years of experience with this specific tax incentive. We are a professional, dedicated firm that isn’t relying on an affiliate to provide this service. We have a team of in-house experts in place that will prevent you from feeling buried beneath a pile of fiscal documents and other data, so your time can be used more efficiently. Without Clark Schaefer Hackett, you could miss savings opportunities using an IC-DISC. A trusted advisor will help you become aware of all the nuances, details and parts of the formation process.

We can assist you with all phases of your IC-DISC, including implementation analysis, proper structuring, calculation of the benefit, and the ongoing compliance requirements. We understand the needs of closely held businesses and how to optimize IC-DISC benefits to fit your organization.

© 2014

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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