Understanding the Benefits of an IC-DISC: Is it Right for You?

August 28, 2018 | Article

Recently, more companies in the manufacturing industry are becoming involved in foreign transactions, including exporting. However, many are not aware that they can improve their cash flow and reduce their U.S. tax liability through the use of the IC-DISC export tax incentive.

An Interest-Charge Domestic International Sales Corporation, more commonly known as 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 to potentially defer export related income to future tax years.

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.

Learn more about the basics of IC-DISC

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:

  1. Export property must be manufactured in the U.S.
  2. Export property must be sold for direct use outside the U.S.
  3. Less than 50 percent 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:

  1. Leasing U.S. manufactured property for use outside of the U.S.
  2. Export sales of property that is extracted, produced, or grown in the U.S., including crops and livestock.
  3. Engineering and architectural services provided for construction projects located outside the U.S.

We recommend that profitable businesses with at least $1 million of qualified export sales consider the benefit an IC-DISC tax structure.

Our IC-DISC Expertise
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 side-by-side 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.

Ready to see how an IC-DISC can impact your company?

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International Business Services International Tax Tax U.S. Export Tax Incentives (IC-DISC)