An IC-DISC is an Interest-Charge Domestic International Sales Corporation. It’s a legal entity authorized under the Internal Revenue Code and it was created to incentivize the export of U.S. goods.
Its structure allows exporters to shift ordinary income to qualified dividend income.
How does it work?
There are multiple structures, but typically an exporter or entity pays a commission to the IC-DISC. The IC-DISC pays that commission as a dividend to its shareholders. The IC-DISC receives the commission tax-free.
Example: Mom and dad own ABC Inc. They establish an IC-DISC for ABC Inc. and pay a commission of their international sales to it.
The IC-DISC pays that commission as a dividend to its shareholders – mom and dad’s children. The children pay tax on the dividend, and ABC Inc. receives a generous tax benefit on the commission payment.
Which activities qualify for an IC-DISC?
- Manufacturing a finished product and selling it to customers outside of the U.S.
- Exporting crops to customers outside of the U.S.
- Providing architectural and engineering services outside the U.S. on a structure built outside of the U.S.
- Distributing products outside of the U.S., even if the products have been manufactured or grown within the U.S. by an unrelated party
- Manufacturing a product that becomes an essential part of a finished product, which is exported outside of the U.S.
How to calculate the commission payment
You can use a few different methods to calculate the commission paid to an IC-DISC.
The two simplest are:
1) 50% of the export net income
2) 4% of the export gross receipts, limited to the export net income.
You can use either of these methods to calculate commission in any given year. Once you select a method, you don’t have to apply it in the following years.
A transaction by transaction approach can also be used to calculate the commission on each export transaction or group of transactions for that fiscal year.
Data must be provided for costs associated with each individual transaction, but this method can substantially increase the amount of commission calculated, and therefore, the tax benefits.
This method is especially beneficial to entities with a range of margins on their exports.
Applying the transaction by transaction approach
Consider this example.
In 2015, ABC Inc. had export gross receipts totaling $869,000 and a net export income of $114,500. Included in the net export income was one transaction that produced a loss.
If the commission payment is calculated based on the group of export transactions, the tax savings would be $9,050.
However, if ABC Inc. elects the transaction by transaction approach, their tax savings increase to $18,100. That’s a 100% increase in tax savings.
Have questions about IC-DISCs? Let’s talk!