For companies exporting from the U.S., the Interest Charged Domestic International Sales Corporation (IC-DISC) is the only significant remaining tax incentive which may provide a permanent tax benefit for exporters.
There are two types of IC-DISCs: Commission IC-DISCs and Buy-Sell IC-DISCs. Commission IC-DISCs are much more prevalent because they generally are easier to administrate. However, given the right situation, the Buy-Sell DISC may provide a greater benefit.
The commission IC-DISC charges its related supplier (of the export goods) a commission based on the related supplier’s export sales. The maximum commission amount is established in the Internal Revenue Code, but it generally is the greater of 4% of qualified gross receipts or 50% of the net profit on the qualified gross receipts. The commission paid is a deduction for the related supplier.
The receipt of the commission is income to the IC-DISC. However, IC-DISCs are exempt from income tax. In most cases, the IC-DISC is required to distribute the commissions to its shareholders as a qualified dividend.
The Benefits of the IC-DISC
The main benefit of the IC-DISC is the tax rate differential between the commission expense, at the related supplier’s marginal tax rate, and the dividend income at the IC-DISC shareholders’ qualified dividend rate.
In some cases, the IC-DISC can also defer the required distribution related to the first $10 million of qualified export sales. This deferred amount can, in turn, be loaned back to the related supplier to fund ongoing operations.
In most cases, the stockholders of the related supplier are the stockholders of the IC-DISC. However, the IC-DISC can also be used as an estate planning tool, as an executive compensation plan, or as a retirement planning tool through the use of a Roth IRA.
The IC-DISC can be beneficial in a number of situations, including where the related supplier is a:
• partnership with individual shareholders
• an S Corporation
• a closely held C Corporation, or
• a C Corporation with Foreign Ownership
In the case of a C corporation with foreign ownership, with proper structuring, the benefit of a commission IC-DISC on $10,000,000 of qualified gross receipts with a net profit of $4,000,000 could be as much as $600,000.
The costs of administration of the IC-DISC can vary substantially based on both ownership of the IC-DISC and the number of products the related supplier exports. However, this is a real, permanent benefit that could be invaluable to your client.
While the IC-DISC structure may provide a tremendous tax benefit to your company, there are a number of specific requirements and restrictions that must be met to qualify. These tips should not be used or relied upon in regard to any particular situation or circumstances without first consulting the appropriate advisor.
For additional questions or for more information, contact Kay Biscopink 864.250.3941 or Doug Hayes 864.370.5601.