Tax Incentive for Exporters: IC-DISC
A tax saving opportunity for manufacturers with significant export sales is the Interest Charge Domestic International Sales Corporation (“IC-DISC”).
An IC-DISC arrangement works in a manner similar to the Extra Territorial Incentive (ETI), which was fully repealed in 2007. To qualify, a manufacturer must produce goods substantially in the U.S. which are destined for overseas markets. However, rather than a deduction computed as part of an exporter’s income tax return, the DISC is a separate corporation established to receive commissions from the exporting company.
The commissions paid to an IC-DISC are computed in accordance with provisions of the Internal Revenue Code and are generally equal to the greater of 50% of export profit or 4% of export gross receipts. In addition, qualified dividends received by individuals are subject to a reduced income tax rate of 15% or 20%. Combining these favorable rules, use of an IC-DISC thus creates deductible dividends to an exporting company providing permanent tax benefits equal to 15% - 20% of export profit.
IC-DISCs must satisfy a number of technical requirements, but once understood, are easy to operate. This technique can benefit privately-held exporting companies and their shareholders in a variety of ways. An IC-DISC can be used as a tax savings vehicle that provides additional working capital to the business, it can be a liquidity vehicle for shareholders, it can be used as incentive compensation for key employees, or it can be used as an estate planning tool to transfer value to the next generation.
An IC-DISC is an important tax benefit available to exporters.