The Interest Charge Domestic International Sales Corporation (IC-DISC) offers significant Federal income tax savings for making or distributing US products for export. The IC-DISC was originally created by Congress to promote export sales by allowing companies to defer income, with interest charged on the deferred tax. Now, the IC-DISC provides significant and permanent tax savings for producers and distributors of U.S. made products used abroad.
Who Can Benefit?
IC-DISC benefits are available to qualified producers or distributors that are either directly involved in exporting, or selling products to distributors or wholesalers who resell for use outside of the U.S. This includes traditional manufacturers as well as those who grow agriculture products, extract minerals, distribute U.S. made goods, and develop software. Engineering and architectural services related to foreign construction projects are also included.
How does IC-DISC work?
An IC-DISC is a separate entity that earns a “commission” on the operating company’s export sales based on the greater of
- 50% of net income on sales of qualified export property or
- 4% of gross receipts from sales of qualified export property.
A properly executed IC-DISC isn’t taxable at the entity level. So, the operating company receives a deduction for the commission paid at ordinary tax rates and the IC-DISC pays no tax.
It distributes all of its profits as qualified dividends, and the owners pay tax on the dividends at more favorable capital gains tax rates. Depending on the owners’ personal income levels, federal capital gains tax rates could be as low as zero or 15% — or as high as 23.8% (the highest federal capital gains rate of 20% plus an additional 3.8% of net investment income tax).
Benefits of IC-DISC
The IC-DISC commission payment reduces the exporter’s taxable income, thus reducing tax liability by the marginal tax rate of the commission amount. The commission is taxed at the qualified dividends rate only when distributed to shareholders as dividends. The transfer of income to the IC-DISC creates a permanent tax rate arbitrage on the export sales commission of 15 to 18 percent.