Potential tax benefit for U.S. companies that export
U.S. exporters that create an Interest Charge Domestic International Sales Corporation (IC-DISC) can benefit from potentially large tax savings with relatively low initial costs. By incorporating an IC-DISC, exporters can transform at least one-half of their taxable income from qualified export receipts into a qualifying dividend, which could reduce the tax bill on that portion of their income by approximately 40% (and the overall tax bill on exports by approximately 20%).
If a business can qualify for the IC-DISC setup (see this article from the Journal of Accountancy for a list of qualifications), then:
- The business creates an IC-DISC corporation (or if the business is a C corp, the shareholders create the IC-DISC). This new entity is a C corporation but a tax-exempt corporation, so it does not pay taxes (but does file a separate tax return).
- Note there is NO requirement though that the owners of the IC-DISC be the same owners as the exporting business, or that the owners have the same % ownership in each company.
- The IC-DISC and the business enter into a commission agreement where the IC-DISC serves (at least on paper, no actual services have to be performed) as a sales agent. There is a cap on how much commission can be charged.
- The IC-DISC charges a sales commission to the business. The business gets a deduction (ordinary tax savings) for this commission payment.
- The IC-DISC does NOT pay taxes on the commission income (since it is a tax-exempt entity). Rather it passes out its income to the individual shareholders as a dividend.
- These dividends are then taxed at the applicable dividend tax rates (up to 20% for federal taxes).
- Note that some states do not recognize the tax-exempt status of the IC-DISC. For example, Michigan does but California does not.
For more information on IC-DISC tax benefits, contact a ShindelRock tax professional.