What is an IC-DISC?
IC-DISC is short for Interest Charge Domestic International Sales Corporation. It is a separate legal entity, recognized by the IRS, which is set up for the purpose of taking advantage of certain tax incentives for U.S.-based exporters. Originally enacted by Congress in 1971, it is the last surviving incentive for U.S. companies that have products or services delivered outside the United States.
Who should consider setting up an IC-DISC?
You should consider setting up an IC-DISC if:
- You have export sales of products or services over $2 million
- You have minimum net export sales of $500,000
- You have significant tax liability on current or projected income
Who qualifies to set up an IC-DISC?
In order to qualify for an IC-DISC, the U.S. exporter must export items that:
- Are grown, produced, manufactured or extracted in the United States by a person or entity that is not the IC-DISC
- Are held primarily for sale, lease or rental for direct use, consumption or disposition outside the United States, and
- Contains a minimum of 50% U.S. content
How does an IC-DISC save money on taxes?
An IC-DISC provides a permanent federal income tax reduction to the shareholders of the IC-DISC. The tax savings is realized when the exporting company deducts the commission it pays to the IC-DISC, reducing ordinary taxable income. Commissions paid to the IC-DISC would typically be taxed at 39.6%. The commissions paid to the IC-DISC are distributed to the owners of the IC-DISC at qualified dividend rates (23.8%), resulting in a tax savings of 39.6%-23.8% or 15.8%.
The three steps to export sales tax savings are summarized as follows:
- Exporting company creates new legal entity and elects federal non-taxable IC-DISC status
- Exporting company pays a commission to IC-DISC (reducing taxes at 39.6% rate)
- IC-DISC pays qualified dividend to exporting company (taxable at 23.8%)
Why Choose Veracity?
Setting up and maintaining an IC-DISC structure requires deep knowledge in this specific area of the tax code. Setting up the IC-DISC requires selecting the proper state to house the IC-DISC. Selecting the methodology of calculating the commission on export sales requires extensive experience in this area of the tax law. Finally, ongoing tax compliance is vital to retaining and defending the benefits derived by using the IC-DISC structure. Veracity’s leaders and staff have the depth of knowledge and expertise required to perform the complex tasks associated with a proper establishment of an IC-DISC and the tax expertise to help you maximize the benefits.
Frequently Asked Questions
Unless you are using one of the Big Four accounting firms, your tax preparer typically will not have the expertise in-house to handle the complex issues surrounding the establishment of an IC-DISC structure and the continued commission calculations required. He or she will generally look to an outside provider, such as Veracity, for the expertise to assist the client in need of IC-DISC services.
The passage of the American Taxpayer Relief Act of 2012 made the IC-DISC structure a permanent part of the tax code going forward. This knowledge allows the owners of the exporting company to set up the IC-DISC structure without the fear of the incentive going away in the future.
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In all of our projects, we prepare an initial no-cost analysis to determine the benefits of setting up an IC-DISC. From this analysis, we determine the cost of the IC-DISC and then you can make a final decision whether an IC-DISC would be beneficial to you and your business. The fees are 100 percent deductible, and, from our experience, the benefit will greatly outweigh the costs of setting up and administering the IC-DISC.