Benefits of an IC-DISC
- Is the last export tax incentive for U.S. businesses
- The exporter pays commissions to the IC-DISC, which are deductible to the exporter and the deemed or actual dividend payment of the commission income in the IC-DISC is taxed to the exporter’s shareholders or partners at a favorable 20% rate.
- Thus, the exporter receives a deduction of 35% on the commission payments made to the IC-DISC, and only pays a 20% tax rate on the income repatriated from the IC-DISC.
- The result is a permanent tax saving for U.S. exporters and their shareholders of 10% or higher of net export income.
TAX GROUP INTERNATIONAL (TGI TAX)
R&D TAX CREDIT and FEDERAL & STATE TAX ADVISORY SERVICES
IC-DISC FEDERAL EXPORT TAX INCENTIVE
The Interest Charge Domestic International Sales Corporation (IC-DISC) is the one remaining export incentive and its use results in permanent tax savings for U.S. exporters and their stakeholders of 10% or higher of net export income. The IC-DISC was first enacted by Congress in 1971 to encourage U.S. export trade to strengthen the economy and to reduce the incentive for U.S. companies to shift manufacturing operations abroad. Now, the IC-DISC provides significant and permanent tax savings for producers and distributors of U.S. made products used abroad by allowing companies to defer income, with interest charged on the deferred tax.
Which businesses may qualify for an IC-DISC?
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. Exporters that are good candidates for the IC-DISC include, but are not limited to, the following:
- Manufacturers that directly export their products
- Manufacturers that sell products that are destined for use overseas
- Architectural and engineering firms whose work will be constructed abroad
- Firms who grow agriculture products, extract minerals and develop software
- Pass-through entities and privately held corporations
This includes, but not limited to 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?
The owner of the operating company forms a tax-exempt IC-DISC. The IC-DISC must maintain its own bank account, accounting records and file U.S. tax returns, but otherwise there are no changes to business operations.
- The operating company pays a tax deductible commission to the IC-DISC equal to at least the greater of 4% of operating company’s gross receipts from qualified exports or 50% of the operating company’s net income from qualified exports.
- The operating company expenses the commission and reduces ordinary income taxed at a maximum 39.6% rate.
- The IC-DISC is tax exempt and is not taxed on the commission income it receives from the operating company.
- The IC-DISC pays dividends to its shareholders, which are taxed at a 20% rate.
- The result yields a 19.6% permanent tax rate arbitrage (3.8% net investment income tax may yield different results).
What are the requirements and qualifications for the IC-DISC?
In order to take advantage of the tax benefits provided by the IC-DISC, the U.S. exporter has to satisfy several requirements, and the IC-DISC has to pass some tests to qualify as an IC-DISC. The U.S. exporter has to meet the following requirements:
- U.S. Manufacturing Requirement. The IC-DISC can serve as a buy-sell agent or a commission-based agent but the export property must be manufactured in the United States. Property is deemed to be manufactured within the U.S. if either 20 percent of its conversion costs are incurred in the U.S. and there is a substantial transformation in the U.S.; or the operations in the U.S. are generally considered to constitute manufacturing. Additionally, U.S. architectural and engineering services for projects located outside the United States also qualify.
- Destination Test. The export property must satisfy a destination test, which means it must be held for sale, lease or rent in the ordinary course of business for use, disposition or consumption outside the United States. Property satisfies the destination test if it is sold to a customer in the U.S., provided the property does not need further manufacturing by the purchaser prior to export and the property is shipped to a foreign destination within one year. Under this test, the purchasers will have to provide the exporter with information showing that the product was exported outside the United States.
- Minimum of 50 Percent U.S. Content Requirement. The export property should have no more than 50 percent of the value of the final product attributable to foreign components. This is to encourage the domestic manufacturer to employ U.S. suppliers.