Companies involved in international business are critical to the American economic landscape. However, these businesses often face significant regulatory tax issues. It’s essential for businesses to take advantage of the various cross border tax incentives available such as Interest Charged Domestic International Sales Corporation (IC-DISC) planning. Belfint Lyons & Shuman wants you to know about how this little-used tax incentive can help certain US Exporters reduce overall tax liability by up to 20%. Like most international tax incentives, the details surrounding an IC-DISC are quite complicated, but the benefits are quite compelling.
What is an IC-DISC?
An IC-DISC is a “paper” company established for the purposes of receiving commissions on export sales. Since it’s an actual subsidiary company there is a need to be separate from its parent in fact and function; it must have separate bank accounts, accounting records and even file its own U.S. tax returns. The good news is that IRS does not require a separate office, employees, or tangible assets nor does it have to provide any services other than receiving commissions.
Not every company meets the criteria to take the IC-DISC selection. The company must be private and organized as an S-Corp, partnership, LLC, or closely-held C-Corp. In addition, the company must also satisfy several other requirements including:
- A single class of stock with an aggregate minimum par value of $2,500;
- 95% of gross receipts involve goods manufactured in the U.S;
- 95% of the assets of the IC-DISC are inventory for export;
- Separate records must be maintained by the IC-DISC; and
- The IC-DISC is not a member of a foreign sales corporation.
How an IC-DISC Works
The mechanics of how an IC DISC operates are somewhat complex. A summary level explanation of how the tax savings are realized by the shareholders is outlined below.
- SAMPLE Company forms a tax-exempt IC-DISC;
- SAMPLE Company pays a commission for/or export sales to the IC-DISC based upon a determined rate;
- SAMPLE Company deducts the commissions from its ordinary income (taxed at 35%);
- The IC-DISC pays no tax on the commissions because it is tax-exempt;
- The IC-DISC distributes dividends to its shareholders which are taxed at the capital gains rates (of up to 15%);
- The resulting tax savings are up to 20% of the commissions.
Are you considering an IC-DISC for your company? There are several factors to consider prior to implementing an IC-DISC structure. To determine whether your company qualifies for, or will benefit from an IC-DISC, contact Kathryn Schultz, CPA, at 302-225-0600, or click here to email Kathy. During an initial consultation she can gather information needed to determine how an IC-DISC may benefit your company.