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October 2011 – IC-DISCs Create an Incentive for US Exporters

IC-DISCs create an incentive for exporters

If you export U.S.-made products/services, give an IC-DISC serious consideration.

Emerging technologies and foreign markets make export trade more accessible and attractive than ever.

What’s often overlooked is an existing incentive for businesses to think globally.  That incentive comes in the form of the Interest Charge-Domestic International Sales Corporation (“IC-DISC”).  IC-DISCs provide a valuable tax incentive for exporters of US sourced goods and services.

Under prevailing 2011 tax law, IC-DISCs can provide up to a 20 percent tax advantage on qualifying  export income compared to exporters not utilizing an IC-DISC.  The 20% tax advantage exists if the exporter pays federal income taxes at the 35% and its deductible IC-DISC payments are distributed to the IC-DISC owners who are taxed at a 15%. 

IC-DISCs provide this tax incentive by (1) not taxing the IC-DISC’s export income (2) allowing the related exporter to deduct its IC-DISC payments and (3) taxing IC-DISC owners’ distributions at a maximum 15% rate.

Obviously if tax changes affect the relationship between corporate rates and individual dividend rates this incentive could reduce or even disappear. 

The IC-DISC is federal tax incentive so state/local tax reduction/avoidance is an integral part of IC-DISC planning. 

IC-DISC Key Elements/Requirements

IC-DISCs are not difficult to set up or maintain.

IC-DISCs need not (a) perform services, (b) hire employees or (c) have any tangible assets.   But IC-DISCs must (i) maintain their financial and accounting records, and (ii) file a federal tax return.

The exporter can be a C Corporation, S Corporation, LLC or partnership.  

IC-DISCs must be domestic, single class of stock C Corporations with a minimum stated capital.  IC-DISC shareholders can be individuals, corporations, trusts or a combination of the foregoing.  IC-DISC shareholders need not match the exporter’s owners/shareholders. Estate-planning considerations, as well as, compensation planning, may drive those ownership differences.

Substantially all an IC-DISC’s income and assets must be export related, and the exported products/services must be mostly U.S. content.  IC-DISCs require IRS approval on the basis of timely filed paperwork and their benefits only begin after that approval.

The exporter pays the IC-DISC a commission limited to the greatest of: (A) 4 percent of the export gross receipts, (B) 50 percent of export sales net income or (C) a commission acceptable under traditional IRS related party pricing rules. IC-DISC shareholders can defer tax on IC-DISC export income related distributions by paying a small interest charge at the T-bill rate (at this writing less than 1%).

Historically, all incentives of this type arrive with a plethora of traps for the unwary.  IC-DISCs are no exception. 

To learn more about IC-DISCs and how they may favorably impact your business, contact Stephen C. Smith, or your Holbrook & Manter representative before attempting to design, establish, qualify or operate an IC-DISC.  We facilitate IC-DISCs for growth-minded clients.

TAGS: International; Corporate tax; Deductions; Estate Planning