One of the most frequently overlooked tax incentives for small and mid-sized manufacturers that export goods overseas is the IC-Disc (Interest-Charge Domestic International Sales Corporation). Fewer than 5,000 companies currently take advantage of these tax incentives, but many more are eligible. It is worth investing some time to determine your company’s eligibility as your overall tax savings may be as high as 15.8 percent on half of the profits of your export sales.
The IC-Disc has been around for a number of years, but it was used only in very limited circumstances until the tax rates on qualified dividends were significantly lowered below the ordinary income rates. The IC-Disc is now the last remaining tax incentive available to exporters of U.S. goods and certain services. The government continues to support this tax incentive because it helps U.S. manufacturers and encourages exports.
There are generally three types of businesses that may qualify for the IC-Disc:
- Small and mid-sized manufacturers that manufacture their products in the U.S. and export their products overseas, including to Canada and Mexico.
- Companies that provide architectural and engineering services in the U.S. for structures that are built overseas, including in Canada and Mexico.
- Companies that manufacture components in the U.S. for other companies that use them to produce products that are exported overseas, including to Canada and Mexico.
An IC-Disc reduces your tax liability by converting a portion of your export income from being taxed as ordinary income at a rate of 39.6 percent into a qualified dividend which is taxed at a rate of 23.8 percent. For the purposes of this article, we are using rates attributable to individuals and pass through entities (i.e. sole proprietors, S corporations, and partnerships).
The basic structure is to set up a corporation for which you make an election to be treated as an IC-Disc. Your operating company pays a commission, which can be calculated in a number of ways, to the IC-Disc based on your export sales. The commission is a tax deduction to the operating company at a 39.6 percent benefit.
As long as certain annual qualifications are met, the commission income is tax free to the IC-Disc. When the IC-Disc distributes this income to shareholders, it is taxed to the shareholders as a qualified dividend at a 23.8 percent rate. This results in an overall tax savings of 15.8 percent. However, tax savings may be more or less depending upon the shareholders’ income level and overall tax rate.
An IC-Disc can also be used by closely held C corporations. The C corporation receives a tax deduction for the commission payment to the IC-Disc, which can then be distributed to the shareholders as a qualified dividend. This is an effective way of getting cash to the shareholders of a closely held C corporation without the corporate double tax.
If your company exports goods or services, you should explore the benefits of an IC-Disc. The time to act is now! Benefits cannot be applied retroactively; they start the day the IC-Disc is incorporated. We encourage you to contact your Kreischer Miller advisor to learn more about how an IC-Disc can benefit your organization.
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