“Why hasn’t anyone ever told me about this export tax incentive before?”
I get this question or some variation of it at every seminar we host to discuss the Interest Charge Domestic International Sales Corporation (IC-DISC) tax incentive. The IC-DISC is the only export tax incentive available to exporters. It has been around since before disco music, yet most companies still know little to nothing about it!
The way the IC-DISC works is that the exporter creates a separate entity, an IC-DISC, which acts as a commission agent on the exporter’s export sales. The U.S. exporter pays the IC-DISC a tax-deductible commission. The IC-DISC pays no income tax on the commission income. The IC-DISC pays a dividend to its shareholders who are taxed at the current preferred qualified dividend tax rate of 23.8%.
The IC-DISC provides an opportunity for small-to-medium-size companies to have up to 85% of their export profits excluded from U.S. taxation. Profits are taxed at the current dividend rate of 23.8% as opposed to the ordinary income rate of up to 39.6%. The significant savings afforded by the IC-DISC are meant to increase the competitiveness of a U.S.-based company’s export sales to help it compete in the global market. If the IC-DISC is owned by foreign owners in a treaty country, the tax rate on the dividends paid out by the IC-DISC could be as low as zero.
Like all tax incentives, the IC-DISC can be very complex. The first mistake companies make is not taking advantage of the IC-DISC. They do not realize they are eligible. It is one of the most underutilized tax incentives out there. The second mistake is not taking full advantage of the IC-DISC by maximizing the allowable benefits.
Our economy depends on strengthening our manufacturing sector and encouraging exports. The IC-DISC is designed to help manufacturers that export to grow and expand their business. It is time to get educated and learn if your manufacturing business qualifies and what type of IC-DISC would best benefit your company. The IC-DISC is a complex tax incentive. Make sure you are working with a tax expert experienced in this area of the tax code.