IC-DISC (Interest Charge – Domestic International Sales Corporation)
IC-DISC is an acronym for Interest Charge – Domestic International Sales Corporation. It is the only export incentive available to U.S. exporters, after the Extraterritorial Income Exclusion (EIE) was repealed in 2005. IC-DISC has become more popular among exporters since the Jobs and Growth Tax Relief Reconciliation Act of 2003 lowered the capital gains tax rate making it more lucrative as a tax strategy.
It is a domestic ‘paper’ entity that does not require employees, offices, or tangible assets. To be an IC-DISC, a corporation must be organized under the laws of a State, or the District of Columbia and elects to be treated as an IC-DISC and is governed under Internal Revenue Code §§991-997.
Which Companies Qualify for IC-DISC?
The different entity types that qualify include:
– Flow-through entities (S-Corps, partnerships, LLCs, etc.); and closely-held C-Corps.
It’s important to note that you do not have to be the manufacturer of any products to take advantage of IC-DISC – you qualify if you export domestically produced products
The industries that have taken advantage of IC-DISC include:
– Software Companies
– Engineering/Architectural firms working on buildings/structures in foreign locations – Scrap/Recycling Companies
IC-DISC is only viable and valuable strategy to the shareholders if the following criteria apply:
Minimum annual gross export revenues of $2,000,000 (direct or indirectly)
Minimum annual net export income of $500,000 (direct or indirectly)
Significant tax liability on current or projected revenues
How Does IC-DISC benefit a US Based Exporter?
The following is an outline of the steps involved in IC-DISC along with its benefits:
Step 1: The exporting company creates a tax-exempt IC-DISC. This is a “paper” entity that does not require office space, employees, or tangible assets. In this example, the IC-DISC is set-up under the ownership of the individual shareholders of the exporting company.
Step 2: The exporting company pays the IC-DISC a commission. The commission may be determined as the greater of 50% of export net income or 4% of export gross receipts. The commission may be increased even more in certain instances.
Step 3: The exporting company deducts the commission amount paid to the IC-DISC from its ordinary income taxed at 35%. The commission income for the IC-DISC is deferred from current taxation.
Step 4: When the IC-DISC pays dividends to its shareholders, the shareholders pay dividend income tax, currently at a rate of 15%.
Step 5: The net effect is a 20% tax savings on the IC-DISC commission.
Click Here to contact a Business Advisor at AcuSolutions to learn more, and find out if your company qualifies for this lucrative benefit!