If you are a small to medium exporter and haven ‘t taken advantage of the IC-DISC (Interest-Charge Domestic International Sales Corporation) export tax credit from the IRS, you may be one of thousands of exporters who are probably paying too much in export taxes.
What is an IC-DISC?
The bottom line is that the tax laws provide an opportunity for a company to use an IC-DISC to have the tax on 50% of its export income reduced by more than 50%. Profits are taxed at the current dividend rate as opposed to ordinary income tax rates.
Who Can Benefit from an IC-DISC?
Exporters who are good candidates for the IC-DISC include (but are not limited to):
- Manufacturers who directly export their products. What counts as a manufactured good is broader than many realize – it can include software, films and many agricultural products.
- A company that manufactures a good or component part that is included in a product that is exported. This is large missed opportunity for many when it comes to the IC-DISC.
- Architectural and engineering firms who work on projects that will be constructed abroad (even though the work is conducted in the United States.)
- Pass-through entities and privately held corporations
How Does an IC-DISC Work?
In a nutshell, you are creating a separate entity (or sometimes several entities to maximize the tax benefits) – the “Corporation part of IC-DISC. The exporter pays commissions to the IC-DISC. The owners of the IC-DISC will report this income as dividends when the money is distributed. The IC-DISC structure allows owners the opportunity to convert regular income taxed at 35% into dividend income taxed at 15%.
How is the IC-DISC Structured?
An IC-DISC basically acts as a “paper entity. It does not require office space, employees or tangible assets but must meet these requirements:
- Elects to be treated as an IC-DISC and such election is in effect for the tax year. (Benefits begin once the election is made so waiting will delay your benefits)
- Has a minimum capital of $2,500 (at par or stated value)
- Has only one class of stock
- Has at least 95% of qualified gross receipts and 95% of qualified assets at the close of the year. (This requirement is easy to satisfy)
- Shareholders can be corporations, individuals, or a combination of both
While big tax savings like this aren ‘t exactly a walk in the park, the IC-DISC structure is the only remaining tax incentive available for exporters. The IC-DISC is a grossly underutilized tax credit, which means that those businesses that could take advantage of these benefits, but are not, are paying too much in taxes.. The cost to implement an IC-DISC is relatively small compared to the savings you could gain. If you are an exporter, it makes good business sense to determine if an IC-DISC can reduce your tax burden.