An Interest Charge Domestic International Sales Corporation, or IC-DISC, is an exporting incentive for U.S. firms that can drastically boost your profitability, ROI and fiscal savings.
Despite the benefits, too few organizations take advantage of – or maximize – this federal tax savings opportunity. This incentive is available to companies that export their own goods, as well as companies that manufacture a good that is part of, or included in, a product that is exported by others – and this is where many businesses miss out! Learning more about the IC-DISC can lead to more money in your pocket.
How an IC-DISC Works
An IC-DISC is an entity that your company simultaneously creates and enters into a written agreement with. This corporation is not subject to corporate income tax. Instead, the tax is deferred until the income is paid as a dividend to its shareholders. The IC-DISC may be used by your company to facilitate the sale of products that are manufactured in the U.S. and sold outside the U.S. In addition, engineering services performed in the U.S. can qualify for treatment as an export sale for this purpose if the benefits of such services are realized outside the U.S.
Once you set up an IC-DISC, your company pays a commission to it and deducts the commission, while the IC-DISC pays no tax on the resulting commission income. Individual shareholders are then taxed at the qualified dividend rate of 20% on dividends they receive from the IC-DISC. You can sell and export goods as you normally would – the IC-DISC has no interface with your customers – but reap the rewards of tax savings.
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.
An Example of Potential Tax Savings
USCo has export sales of $6 million through its IC-DISC. Using the 4% gross receipts method, USCo will deduct a commission paid of $240,000 ($6M X 4%), resulting in a U.S. tax reduction of $84,000 (35% of $240,000). If USCo declares a dividend for this income to its sole owner, Individual A, the dividend would be taxed as a qualified dividend at a 20% tax rate for a total tax of $48,000 ($240,000 x 20%). As a result, the net tax savings would be $36,000 ($84,000 less $48,000). Please note that dividends can also be subject to an additional 3.8% net investment income tax. This is ignored for purposes of this example but needs to be taken into account when computing the potential benefit.
Establishing an IC-DISC
To set-up an IC-DISC, a new C corporation will have to be established. After the corporation is established and you have documentation to that effect, you can file an election with the IRS to treat the corporation as an IC-DISC. 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. Because the analytics portion of IC-DISC implementation can get complicated, there are benefits to discussing this with a knowledgeable advisor.
Examining if an IC-DISC is right for your company
If an IC-DISC structure sounds desirable, Clark Schaefer Hackett advisors would be happy to explore the opportunity with you. Further analysis can be performed to ensure that your company’s circumstances would be optimal for this type of structure.
Learn more about what companies and activities qualify.
Be one of the smart companies that boosts its profits by taking advantage of this incentive!
Ready to start a conversation?