Main Menu
IC-DISC Structure Offers Real Tax Savings for Exporters
Posted in Tax and Finance

Does your company export domestic products or provide services to customers located outside of the United States? If so, how would you like to cut your federal individual income tax rate by nearly 20 percent?

To realize this tremendous tax benefit, your company should consider forming an interest charge-domestic international sales corporation (IC-DISC). This will allow you and your company to take advantage of the preferential tax rates on qualified dividends, which were permanently extended by Congress earlier this year.

What is an IC-DISC?

An IC-DISC is typically formed as a wholly-owned United States corporate subsidiary of a domestic exporting company and serves as the exporting company’s foreign sales agent. After the IC-DISC is incorporated, it must file an election with the Internal Revenue Service to be treated as an IC-DISC, which is not subject to federal income tax and certain state income taxes.

In such a structure, the IC-DISC receives a sales commission from the exporting company on each qualifying sale of products or services to non-U.S. customers. If certain qualifications are met, a valid IC-DISC structure can functionally convert income taxed at an ordinary income rate to qualified dividend income taxed at a substantially lower rate. For example, for an owner of an exporting company in the top marginal income tax bracket, an IC-DISC can convert ordinary income that is taxed at a marginal tax rate of 39.6 percent to qualified dividend income taxed at a substantially lower maximum rate of 23.8 percent when including the new 3.8 percent tax on net investment income.

The man behind the curtain

Implementing the IC-DISC structure results in optimal tax savings when the exporting company is taxed as a pass-through entity (such as an S corporation or partnership). This way, the exporting company’s owners can recognize the IC-DISC structure benefits.

IC-DISC tax savings occur through a series of transactions, the mechanics of which are relatively straightforward:

  1. On each sale of qualifying property or services to foreign customers, the exporting company pays a sales commission to the IC-DISC, which is deductible by the exporting company in arriving at its net taxable income, which produces a tax benefit of up to 39.6 percent.

  2. Since the IC-DISC is a tax-exempt entity, it recognizes no income on the receipt of these sales commissions, thus no tax.

  3. Before the end of its taxable year, the IC-DISC distributes its sales commission receipts to the exporting company, its sole shareholder, via dividends. If the exporting company is a pass-through entity, the exporting company’s owners are taxed on the dividends at their respective qualified dividend rates, at a maximum of 23.8 percent.

The net benefit is a tax rate cut of up to 15.8 percent. Other strategies can provide additional tax benefits.

clientuploads/Publications/Blog and Article Photos/IC-DISC Structure.png

Sounds easy, right?

Not quite. In order to realize these extraordinary tax savings, your IC-DISC must meet a number of strict qualifications. A failure to follow each and every statutory requirement could blow your IC-DISC election, resulting in zero tax savings and potential tax costs. Among several requirements, every IC-DISC must meet certain capitalization and stock requirements, and also pass the qualified export receipts test and a qualified export assets test. Consider exploring whether your company meets the requirements to implement an IC-DISC structure to realize the associated tax benefits.

If your company has questions about incorporating an IC-DISC structure into its operations, please contact a member of the Tax and Finance Practice Group at Bingham Greenebaum Doll LLP.

DISCLOSURE REQUIRED BY CIRCULAR 230. This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service. If this article, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party. Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this article. Thank you.

  • Partner

    As a Partner and Chair of the Firm’s Tax and Employee Benefits Department, Mark’s practice focuses on resolving clients’ state, local and federal tax issues through planning, audit management, administrative protest ...

  • Partner

    Ross D. Cohen serves as Co-Leader of the Federal Tax Team and concentrates his practice on federal tax transactional and planning issues of partnerships, joint ventures, limited liability companies and S and C corporations.

    With ...

RSS RSS Feed

Subscribe

Recent Posts

Categories

Contributors

Archives

Back to Page