If you’re a company with foreign sales, one suggestion for tax relief is setting up an IC-DISC.
What is an IC-DISC?
The Interest-Charge Domestic International Sales Corporation, more commonly known as the IC-DISC, is an export incentive available for U.S. manufacturers and distributors. The IC-DISC allows certain U.S. businesses to reduce their overall tax liability through a commission mechanism.
Clients with at least $2 million of foreign earned revenue from a product or service that is made primarily in the U.S. are prime candidates for establishing an IC-DISC.
How Does It Work?
The commission mechanism requires the formation of a new corporation which elects to be treated as an IC-DISC. The commission payment is calculated based on export gross receipts, provided that 50% or more of the product’s value is produced in the U.S. The commission is an ordinary business expense to the manufacturing entity, reducing its taxable income. The commission payment is made to the IC-DISC and is not subject to federal tax. The IC-DISC then pays the commission to its shareholders as a qualified dividend.
What Are the Benefits?
The key taxation benefit is generated by the income tax rate differential between ordinary and dividend tax rates. The commission paid creates an ordinary business deduction, while the dividend paid by the IC-DISC is treated as qualified dividend income to the recipient. The top ordinary tax rate is 37% for individuals, while the top capital gains tax rate is 23.8% (assuming that the individual is subject to the new 3.8% Medicare tax on investment income). Therefore, an individual taxpayer could realize a federal income tax savings up to 13.2% on the commission payment. It is important to note that the application of the new Section 199A business income deduction can reduce the overall benefit.