IC-DISC Export Tax Incentives
What is an IC-DISC?
Although many products & services are eligible for this credit, many businesses are not aware of the tax advantages. An IC-DISC (Interest-Charge Domestic International Sales Corporation) is a tremendous export tax incentive designed for small and medium manufacturers that export. The tax laws provide an opportunity for a business to use an IC-DISC to have the tax on 50% of its export income reduced by more than 50%.
What Types of Businesses Qualify for the IC-DISC Tax Benefits?
Closely held companies that earn significant income from exporting US-made products.
There are basically three types of categories:
- A business that directly exports goods it manufactures (this can include software, films, agricultural products)
- A business that provides architectural or engineering services that are conducted in the U.S. for a building/bridge outside the U.S. (e.g. building designed in U.S. and built in Canada)
- A business that manufactures goods included in a product that is exported. (e.g. tires on a tractor)
To qualify as an IC-DISC a corporation must:
- Be incorporated in one of the 50 U.S. states or the District of Columbia.
- File an election with and receive approval from the IRS to be treated as an IC-DISC for federal tax purposes.
- Have only a single class of stock and maintain a minimum capitalization of $2,500 of authorized and issued shares
- Meet an annual qualified export receipts test and a qualified export assets test (meaning that at least 95% of an IC-DISC’s gross receipts and assets must be related to the export of property whose value is at least 50% attributable to U.S. produced content).
How Do You Create an IC-DISC?
In essence you are creating a separate entity “the Corporation”. After requesting and receiving IRS approval to be treated as an IC-DISC it must keep separate accounting records, maintain its own bank account and file U.S. tax returns. You cannot take advantage of the tax benefits until after you have formed an IC-DISC.
How Do The Tax Reductions Work?
The newly formed IC-DISC is presumed to have participated in the export sales activity and is entitled to earn a commission. Your company (the related exporter) is allowed to pay tax-deductible commissions to the IC-DISC which are equal to the greater of 4% of your company’s gross receipts from qualified exports or 50% of your company’s net income from qualified exports. You company’s taxable income is reduced by the amount of the commissions paid to the IC-DISC and such commissions are deductible against ordinary income.
The IC-DISC, as a tax-exempt entity, pays no federal tax on the commission income when the IC-DISC distributes its income to its shareholders; and the shareholders dividend income is taxed at the qualified dividend rate of 20%–available only to individuals (vs. the ordinary income tax rate which can be as high as 39.6%). Because of these taxable savings, it is important that you structure your IC-DISC properly from the beginning to get the best tax reduction possible.
Other IC-DISC Benefits
The IC-DISC can perform other services (although not necessary) that may create income which can then be distributed to shareholders at the qualified dividend tax rate (vs. an ordinary income tax rate). Use it as an estate planning tool or incentive for employees.
Our team provides a no-obligation, confidential IC-DISC analysis with some basic information from you to determine if you are a viable IC-DISC candidate. We discuss the process, the team members and fees associated with forming and maintaining an IC-DISC. Call us at 847-240-1040 to get started.