IC-DISC can save Privately Held Manufacturers Income Tax on ExportsApril 11, 2014
Do you manufacture products in the United States for export to foreign countries?
Do you manufacture products in the United States for export to foreign countries? Is your company privately held? Then you might be eligible for a significant tax-saving opportunity: the interest charge–domestic international sales corporation (IC-DISC).
An IC-DISC is a tax-exempt corporation you can establish to receive commissions on export sales. The IC-DISC’s shareholders typically are the same as the exporters’ but can include family members or key employees.
The maximum commission is the greater of 4% of gross receipts from sales of qualified export property or 50% of net income on those sales. The exporter (i.e., your current operating company) can deduct the commissions paid to the related IC-DISC. Because the IC-DISC is tax-exempt, the commissions aren’t taxed until they’re paid out to the IC-DISC shareholders in the form of qualified dividends. In the meantime, the operating company has generated a business deduction for the commissions paid.
Put another way, the IC-DISC allows the exporter to convert ordinary income (currently taxable at rates as high as 39.6%) into qualified dividend income (currently taxable at rates as high as 23.8%, including the 3.8% net investment income tax). This provides permanent tax savings of 15.8%.
An IC-DISC may provide deferral benefits as well. The exporter can defer tax on up to $10 million in commissions held by the IC-DISC (that is, not distributed to the shareholders) in exchange for modest interest payments to the IRS. Other IC-DISC benefits include:
- Higher return on investment without any operational changes
- Increased liquidity for shareholders
- Wealth-shifting opportunities for estate planning purposes
- Ability to reward key employees in a tax-efficient manner
An IC-DISC doesn’t have to have assets, office space or employees. But it must maintain proper records separate from those of the exporter.
If you produce products in the United States that you export — including to Canada or Mexico — you might benefit from an IC-DISC. But many factors must be considered to determine whether you’ll qualify and, if so, whether you can reap sufficient benefits to warrant setting one up. For assistance assessing whether an IC-DISC could be right for your company, please contact Paul Oliveira, CPA, or any member of the KLR International Tax Services Team.