Did you know that there’s a tax break that was specifically enacted as an incentive to strengthen U.S. manufacturing and encourage exports during the economic recovery?
The Interest-Charge Domestic International Sales Corporation (IC-DISC) may be the very best tax break many businesses aren’t aware of. And, as the growing economy continues to drive exports, the IC-DISC continues to be underutilized. So what exactly is an IC-DISC and should your business be taking advantage of it?
What is an IC-DISC?
It’s a tax code provision that gives companies an opportunity to reduce the tax up to 50% on half of export income. Businesses can achieve this by creating a separate entity (or multiple entities) to which a company pays sales commissions.
The commissions are deductible to the exporter and considered to be a dividend payment to shareholders/partners - taxable at the dividend rate of 15% versus paying the profit out as wages where the ordinary income rate tops out at 37.5%. The IC-DISC is treated as a tax-exempt entity.
This results in a permanent tax saving: The difference between the tax normally paid on ordinary income and the tax paid on dividend income, which can be 10% or higher. Companies can defer income taxes on profits from export sales left in the IC-DISC up to $10 million. In exchange for this benefit, companies pay a small interest charge tied to the T-Bill rate.
Who's eligible for an IC-DISC?
- A direct exporter of goods. For example, if your company manufactures a product in Wisconsin and ships it to Mexico, you are eligible for an IC-DISC. Exported products can include software, agricultural products and more.
- An engineering or architectural firm with international clients. If you create designs in the U.S. used by builders outside the U.S., you are eligible.
- A manufacturer whose product is a component part of an exported product. If your company manufactures brake pads that are included in vehicles that are exported, you are eligible.
Additional requirements are:
- The IC-DISC must be a C corporation organized in the U.S.
- It must have a single class of stock with a minimum of $2,500 of par value outstanding at all times.
- The manufactured product must be manufactured in the US
How to set up an IC-DISC
The IC-DISC is essentially a “paper” corporation with no need for employees, offices or assets. A company that meets the requirements simply files an election to be treated as an IC-DISC and must maintain separate books, records and bank accounts. Finally, and most importantly, at least 95% of the IC-DISC’s assets must be qualified export assets (QEAs) and 95% of its gross receipts must be qualified export receipts (QERs).
This ‘too good to be true’ tax incentive, which has survived two tax reform measures, is absolutely legit. If your business falls within any of the three categories described above, an IC-DISC should be at the top of the agenda at your next meeting with your tax advisor. Click the button below to schedule a free consultation with a Glass Jacobson CPA.