Can Your Company Benefit From the IC-DISC Export Tax Incentive?

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Key Takeaways

  • The IC-DISC export tax incentive is available to manufacturing, distribution, engineering and architectural companies with foreign sales.
  • The IC-DISC allows certain U.S. businesses to reduce their overall tax liability and improve cash flow through a commission mechanism.
  • An IC-DISC creates the opportunity to tax a portion of export-related profits at lower tax rates, and to potentially defer export related income to future tax years.

The Interest Charge Domestic International Sales Corporation (IC-DISC) is an export incentive available for U.S. manufacturer, distributor, engineering and architectural companies. The IC-DISC allows certain U.S. businesses to reduce their overall tax liability through a commission mechanism.

Businesses with at least $2 million of foreign earned revenue from a product that is made primarily in the U.S. are prime candidates for establishing an IC-DISC. In addition, US architecture and engineering service providers who provide their services for projects located outside the US may also benefit.

How Does the IC-DISC work?

The commission mechanism requires the formation of a new corporation that elects IC-DISC classification. Commissions are generally the greater of 4% of gross export receipts, or 50% of net export income. These commissions serve as a standard business expense for the manufacturing entity, reducing its taxable income at ordinary income tax rates. Payments are directed to the IC-DISC and are not subject to federal tax. The IC-DISC then disburses these funds to its shareholders in the form of qualified dividends.

Benefits of an IC-DISC

The main tax benefit comes from the difference between the regular income tax rate and the tax rate for qualified dividends.

When you pay the commission, it’s like a regular business expense that reduces your taxable income.

The money paid as dividends by the IC-DISC to its shareholders is treated as qualified dividend income. For individuals, the highest regular tax rate is 29.6% (after factoring in the 20% Section 199A deduction), while the highest capital gains tax rate is 23.8% (assuming the individual is subject to the 3.8% Medicare tax).

This means you could save at least 5.8% in federal income tax on the commission payment. However, the actual tax savings depend on your personal tax rate.

Requirements of an IC-DISC

The IC-DISC is not required to distribute its accumulated earnings, allowing for the dividend income to be deferred into future tax years. However, the IC-DISC must meet specific requirements each year, so careful planning is needed to achieve the tax deferral benefit.

Export sales must meet the following requirements in order to qualify for the IC-DISC benefit:

  • Export property must be manufactured in the U.S.
  • Export property must be sold for direct use outside the U.S.
  • Less than 50% of the export property’s sales price is attributable to imported materials.

In addition to the export sale of manufactured property, the following transactions may also qualify for the IC-DISC:

  • Leasing U.S. manufactured property for use outside of the U.S.
  • Export sales of property that is extracted, produced, or grown in the U.S., including crops and livestock.
  • Engineering and architectural services provided for construction projects located outside the U.S.
We recommend that profitable businesses with at least $2 million of qualified export sales consider the benefits of an IC-DISC tax structure.

Work with Professionals You Can Trust

Eide Bailly has been serving the manufacturing industry for 90 years and has experience with over 800 manufacturing clients across a variety of sectors. Our experienced international tax professionals work with clients to determine if their company qualifies for an IC-DISC and to establish the proper structure once the requirements are met. We also provide commission calculation and tax return compliance services.

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