An Interest-Charge Domestic International Sales Corporation (IC-DISC) can help companies involved in foreign transactions — especially exporting — improve cash flow and reduce U.S. tax liability. An IC-DISC is a federal tax export incentive entity structuring available for U.S. companies that export goods and services to foreign countries.
An IC-DISC creates the opportunity to tax a portion of export-related profits at lower tax rates and potentially defers export-related income to future tax years. It works through a commission mechanism: the exporter pays a tax-deductible commission based on qualified export sales to a newly created corporation through the Internal Revenue Service to be an IC-DISC.
The IC-DISC distributes the commission income to its shareholder as a qualified dividend subject to tax at reduced capital gains tax rates. The benefit received depends on the tax structuring and effective tax rates. An IC-DISC structuring can produce net tax savings ranging from about 5% to 13% of the commission amount.
The IC-DISC isn’t required to distribute its accumulated earnings, allowing for the dividend income to be deferred into future tax years. It must meet specific requirements each year, so careful planning is needed to achieve the tax deferral benefit.
How to Qualify
To qualify for the IC-DISC benefit:
The following transactions may qualify for the IC-DISC:
If you’re thinking that companies with at least $1 million of qualified export sales can consider the benefit, you’re right. If you’re in food, beverage or agribusiness exports, you may be able to garner tax benefits as well.
How to Reduce Liability
You would pay commissions to the IC-DISC, which is owned by your shareholders or partners. The commissions are deductible to you for U.S. federal tax purposes. The IC-DISC is treated as a federally exempt entity.
Unlike many tax-planning strategies that only result in deferred tax payments, an IC-DISC can provide tax savings that are permanent — typically to the extent of the spread between the shareholders’ top marginal tax rates and the qualified dividend tax rates.
In many ways, an IC-DISC is just a "paper" company. For example, it doesn’t need employees or office space and it doesn’t have to perform any services or participate in sales to earn a commission.
The IC-DISC entity, however, is required to maintain separate books, records and even a separate bank account. It should have only one class of outstanding stock with a par or stated value of at least $2,500.
Since the Tax Cuts and Jobs Act, the benefit has been limited because of the reduction in tax rates and the potential 20% deduction for pass-through entities — resulting in an effective reduction of only 5.8%.
The shareholders of the IC-DISC don’t need to be the same as your company’s shareholders. An IC-DISC can be used to provide a benefit to key employees or as a tool in estate or succession planning.
Give us a call to discuss the issues and risks involved in IC-DISC arrangements.
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