IC-DISC: A Valuable Tax Incentive for Exporters
If your company exports products manufactured in the U.S. to overseas markets, or if you manufacture goods that are included in products exported overseas, you might be able to take advantage of an export tax incentive that could save you thousands of dollars a year. The tax break is commonly referred to as IC-DISC, which stands for Interest-Charge Domestic International Sales Corporation.
The IC-DISC was created by Congress to strengthen the manufacturing sector and boost exports. It was on the chopping block in early versions of the Tax Cuts and Jobs Act that became law last December, but the final version of the tax reform act retained this valuable tax break.
How the IC-DISC Works
To take advantage of this tax break, you must form a separate corporation (the IC-DISC) that will act as a commissioned sales representative for your company. You will then pay a tax-deductible commission of 50 percent or more to the corporation for export sales that are made. Not only is this commission deductible to your business as an ordinary business expense, but it’s taxed at the lower dividend rate of 20%.
The IC-DISC itself is tax-exempt, so it’s not taxed on the commission income it receives. It must maintain its own accounting records and bank account and file its own tax return. Otherwise, however, there aren’t any changes to your business operations. For example, the IC-DISC doesn’t have to conduct any business activities, so a separate office and employees aren’t required.
The result: The taxes on half of your export income can be reduced by 50 percent or more. According to an article published on Forbes.com1, some export companies have been able to double their after-tax income by using this strategy.
In addition to manufacturing products that are exported and components contained in exported products, you can also take advantage of this export tax incentive if you provide architectural or engineering services for buildings or bridges constructed outside the U.S. A wide range of diverse types of companies may qualify for IC-DISC, including the following:
Traditional manufacturers
Farmers and agricultural businesses
Mineral and mining companies
Software developers
Criteria for IC-DISC
The IC-DISC must meet several specific criteria, including the following:
- It must be a U.S. corporation, have one class of stock and a capitalization of at least $2,500.
- It must elect IC-DISC treatment within 90 days of incorporation.
- At least 95 percent of its gross receipts must qualify as export receipts, and at least 95 percent of its assets must qualify as export assets.
- Exported goods must be produced, manufactured or grown in the U.S.
- No more than 50 percent of the exported property’s fair market value may be attributed to goods imported into the U.S.
- The exported goods must be sold or leased for consumption or direct use outside of the U.S.
While the tax benefits of this incentive can be substantial, the details and nuances involved in executing this strategy can be complex. Therefore, it’s a good idea to consult with an expert before moving forward with this strategy.
Concluding Thoughts
If your company exports products manufactured in the U.S., you could save thousands of dollars in taxes a year by forming an IC-DISC. Some export companies have been able to double their after-tax income by using IC-DISC. A wide range of diverse types of companies may qualify for IC-DISC, including those that provide architectural or engineering services for buildings or bridges constructed outside the U.S. An on-demand CFO partner acting as a single project CFO or part-time CFO can help you take advantage of this valuable export tax incentive.
1 IC-DISC: The Big Tax-Break for Exporters; Dean Zerbe; Forbes.com; March 29, 2011
www.forbes.com/sites/deanzerbe/2011/03/29/ic-disc-the-big-tax-break-for-exporters/
Arthur F. Rothberg, Managing Director, CFO Edge, LLC
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