The Interest Charge-Domestic International Sales Corporation (IC-DISC) export tax incentive is available to manufacturing and distribution 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.
What is an IC-DISC?
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 the IC-DISC 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 of an IC-DISC?
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 IC-DISC shareholders. The top ordinary tax rate is 29.6% for individuals (this is net of the 20% Section 199A business income deduction), 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 of at least 5.8% on the commission payment. However, the actual tax savings will depend on the individual’s marginal 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.
Why Choose Eide Bailly For Your IC-DISC Needs
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.
The Foreign Derived Intangible Income (FDII) is another export tax incentive available to C corporations that export goods or services. Our team can help you determine what exports qualify for this benefit and how the benefit works.