I See, You See, We May See an IC-DISC in Your Future!

11/9/2017 - By John Mascaro, CPA

What Is An IC-DISC?

IC-DISC is an acronym for Interest Charge - Domestic International Sales Corporation. It refers to a domestic corporation (a “C” corp) that may defer tax on up to $10 million of income related to “qualified export receipts”. The tax benefit requires shareholders to pay an “interest charge” on deferred income – hence the “IC” in IC-DISC. Strict formation and operating requirements must be met including, but not limited to, U.S. content sourcing and non-U.S. destination requirements. In addition, the IC-DISC’s income is determined under one of three administrative pricing methods. 

More specifically, an IC-DISC is a U.S. “C” corporation which meets the following:

  • Conforms to the tax year of its principal shareholder(s), at least 95 percent of whose gross receipts for the tax year are qualified export receipts 
  • Has qualified export assets whose adjusted basis at year-end equals at least 95 percent of the total basis of its assets that has one class of stock and has stock outstanding with a par value of at least $2,500 on each day of the tax year
  • Keeps its own bank account and separate books and records, and 
  • Elects to be treated as an IC-DISC

Does Your Company Qualify?

Generally, an exporter with a fairly significant level of “qualified export receipts” could be a suitable candidate.  In addition, there should be at a minimum of between $1 - $3 million or more in “qualified export receipts” to warrant the cost of establishing and maintaining the typical IC-DISC structure,

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 who work on projects that will be constructed abroad 
  • Pass-through entities like S corporations and privately held corporations
  • Management companies that render managerial services for furtherance of production or other “qualified export receipts”

What are the tax benefits of an IC-DISC?

Generally, an IC-DISC is not subject to tax on its income! And… the Exporter entity may take a tax deduction for the commission paid to its related IC-DISC! 

The overall tax benefit is derived from the arbitrage between the higher tax rate the Exporter and its owners would pay on its ordinary income absent its commission payments to its IC-DISC vs. the lower tax rate on qualified dividend income the shareholders of the IC-DISC will typically pay (once the IC-DISC pays a qualified dividend to its shareholders).  More importantly, the ownership of the IC-DISC is flexible and can be exactly the same as the ownership of the Exporter itself. 

The overall tax benefit and savings arbitrage from using an IC-DISC arbitrage structure (under present tax rates) could be as high as 15.8% on qualified export income. As you can see below, using current tax rates in 2016, a company without an IC-DISC could pay almost $80,000 more in taxes than a company with the IC-DISC structure. 

Company Without an IC-DISC (S-Corp Status Assumed)

Foreign Trading Gross Receipts

$10,000,000

Cost of Goods Sold

$6,000,000

Selling, General and Administrative

$3,000,000

Export Net Income

$1,000,000

Tax Rate to shareholders of S -Corp

39.6%

Tax Paid

$396,000

 

Company With an IC-DISC (S-Corp Status Assumed)

Foreign Trading Gross Receipts

$10,000,000

 

 

Costs of Goods Sold

$6,000,000

 

 

Selling, General and Administrative

$3,000,000

 

 

Export Net Income

$1,000,000

$1,000,000

 

IC-DISC Commission Deduction

 

($500,000)

$500,000

Tax Base After IC-DISC Commission

 

$500,000

$500,000

Tax Rate

 

39.6%

23.8%

Tax Paid

 

$198,000

$119,000

 

IC-DISC Net Tax Savings $396,000 - ($198,000 + $119,000) = $79,000

 

Thus: $79,000 tax actually paid / $500,000 tax base = 15.8% tax savings!

 

A word of caution: any significant future tax legislation that changes the above tax rates could impact the overall benefit of an IC-DISC structure. That’s why its important to consult your own tax advisor. If you’d like more information on whether an IC-DISC structure is suitable for your for your export business or require other related international tax services, please contact one of our Saltmarsh professionals. 

 If you have any questions about an IC-DISC for your business or other tax related concerns, email John Mascaro or contact any member of our Tax Consulting team.

About the Author | John Mascaro, CPA

John is adept in helping companies develop and execute complex domestic and international tax strategies. He has served some of the world’s largest companies in varied industries, including IBM, Schlumberger, Siemens; and later specialized in the entertainment and media industry serving such notables as Viacom, Blockbuster Entertainment, MTV, VH1, Nickelodeon, SONY Pictures, SONY Music, Newsweek Magazine, McCann Erickson Advertising, Gruner & Jahr Publishing, Reuters and numerous entertainment and media celebrities.

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