An Interest Charge Domestic International Sales Corporation (IC-DISC) structure allows highly advantageous tax benefits to taxpayers who export. The savings can be up to 20% of the tax on exported profits.
What is an IC-DISC?
An IC-DISC offers exporters permanent tax savings, primarily resulting from a reduction in qualified dividends’ tax rate. It is available to manufacturers, distributors, all forms of business organizations, including C corporations, S corporations, partnerships, LLCs, and sole proprietors. Having an IC-DISC will not impact a company’s operations. It is transparent to customers.
Formation of an IC-DISC
An exporter must create a new corporate entity. Within 90 days, the new corporation files IRS Form 4876-A to elect IC-DISC status. This status exempts the entity from federal tax on its earnings. The new IC-DISC enters into a commission agreement with the seller of export goods, whereby the IC-DISC will receive a commission on qualifying sales.
Under the IRS treasury regulations, the IC-DISC is allowed to earn commission income totaling the greater of 50 percent of export profits or 4 percent of qualified export sales (i.e., subject to limitations). The IC-DISC commission is a current deduction to the U.S. exporter at ordinary income rates. When distributed, it becomes a qualified dividend income (QDI) to the IC-DISC’s shareholders. Permanent federal tax savings result from the rate differential on these two income types, a potential savings of 19.6 percent.
It should be duly noted that the flexibility allowed for IC-DISC ownership structures can provide for wealth-transfer, retirement savings, and executive compensation planning opportunities.