Insights: Article

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

By   Mark Griswold

April 06, 2016

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.

The IC-DISC allows certain U.S. exporters to reduce their overall tax liability through a commission mechanism. The exporter manufacturing company pays a tax deductible commission, based on qualified export sales, to a newly created corporation that makes an IRS election to be an IC-DISC. But, by design, IC-DISCs are exempt from federal tax, and therefore do not pay tax on the commission received. The IC-DISC then distributes the commission income to its shareholder as a qualified dividend subject to tax at reduced capital gains tax rates.

The IC-DISC entity can be created by the shareholders of the exporter manufacturing company as a brother-sister configuration, typically used when the exporter manufacturing company is a regular corporation for tax purposes. Or, the IC-DISC can be established by the exporter manufacturing company as a parent-subsidiary configuration when the parent exporter manufacturing company is a pass through type tax entity.

In either case, the benefit received from utilizing an IC-DISC structuring is dependent on the tax structuring and the effective tax rates of the taxpayers involved in the commission transactions. An IC-DISC structuring can produce net tax savings ranging from 11 to 20 percent of the commission amount.

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.

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.

To learn more about the IC-DISC and how it could impact your company, contact Mark Griswold at 303.384.3044 or mgriswold@eidebailly.com. Also please check out our infographic, fact sheet or view our IC-DISC Video.

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