Interest Charge Domestic International Sales Corporation (IC-DISC)
Manufacturers in the United States often are at a disadvantage with foreign competitors because of an unfavorable U.S. tax structure. One tax planning strategy that can help level the playing field is the use of an IC-DISC.
By James M. Taylor, CPA, CFP®
An Interest Charge Domestic International Sales Corporation (IC-DISC) may be used by U.S. companies to achieve a marginal tax rate reduction on income attributable to certain foreign exports. If your company has foreign exports and your export products are primarily U.S. value-add, then an IC-DISC may apply.
The IC-DISC is a unique tax structure that is created by electing to be treated as an IC-DISC under the Internal Revenue Code (IRC). With an IC-DISC election in effect, the IC-DISC is not subject to Federal taxes at the entity level. To maintain IC-DISC status, the IC-DISC must have greater than 95% of gross receipts related to export sales.
The IC-DISC functions as a separate legal entity from an operating company. The purpose of the new entity is to manage foreign sales activity, and for that service, the IC-DISC receives commission payments (which are deductible by the operating company.) Because the IC-DISC is a separate legal entity, it will maintain its own bank account, accounting records and file a U.S. tax return. From an operating stand-point, the IC-DISC does not need to maintain employees or tangible assets.
The tax break from this structure is a result of a tax rate differential. When commission is paid to the IC-DISC, the operating company generates an ordinary business deduction. The commission funds are not taxed at the IC-DISC entity level and only become taxable at the IC-DISC shareholder level as a qualified dividend (taxed at a 15% or 20% rate). The difference between the US corporate tax (the ordinary individual rate for flow through income) and the qualified rate for IC-DISC distributions can result in a 15-20% rate savings.
Profitable manufacturers with export sales in excess of about two million dollars and a desire to return profits to owners may be candidates for an IC-DISC. IC-DISC rules and computations are complex; please contact us for additional information regarding this strategy to find out if it may benefit you.