Should Your Company Be Taking Advantage of the IC-DISC Federal Export Tax?

Should Your Company Be Taking Advantage of the IC-DISC Federal Export Tax?

The Interest Charge Domestic International Sales Corporation (IC-DISC) offers eligible manufacturers and distributors that export U.S. products significant Federal income tax savings, which can come in handy given the current economic environment. In fact, an IC-DISC is treated as a federally exempt entity. No federal corporate tax applies. Could it be right for your business?

Who’s eligible?

To qualify for IC-DISC status, a corporation must:

  1. Pass the qualified export receipt (QER) test (95% of gross receipts during a tax year are qualified export receipts).
  2. Pass the qualified export asset (QEA) test (at the end of a tax year, the adjusted basis of qualified export assets equals at least 95% of the sum of the adjusted basis of all assets).
  3. Have one class of stock with a stated value of at least $2,500 each day of the tax year.
  4. Maintain separate books and records.
  5. Have the same tax year as the principal shareholder with the highest percentage of voting power.
  6. File Form 4876-A, “Election to Be Treated as a Disc.”

What is it and what does it offer?

In 1971, Congress created the Domestic International Sales Corporation (DISC) to promote export sales. According to the New York State Society of CPAs (NYSSCPA), “A U.S. exporter was allowed to allocate a portion of its export profits to a domestic subsidiary (i.e., a DISC) to reduce its U.S. taxes.” Over the years, there have been several changes, with one occurring in 1984 that resulted in DISC owners paying interest on the deferred tax of undistributed earnings (a.k.a. an interest-charge); thus, the IC-DISC was born. The NYSSCPA further explains, “The IC-DISC is actually a corporate tax remedy – one that provides U.S. exporters and manufacturers large tax incentives in order to mitigate potentially significant tax burdens.”

How is an IC-DISC structured?

Typically, a flow-through entity (i.e., an LLC, partnership, or S-Corporation) holds the ownership interest in the IC-DISC (which is a C-Corporation). The IC-DISC can be structured as a buy/sell (taking title to the goods it sells outside the U.S.) or as a commission where it is treated as a commission agent selling products outside the U.S..

Why would you want to consider it?

By setting up a separate corporation and complying with related rules and restrictions, there’s a 15.8% direct tax benefit. If your company is a commission IC-DISC, the export company pays a commission (which is a deduction at the ordinary tax rate) to the IC-DISC based on foreign sales of products manufactured or produced in the U.S. (which is tax-free income). What’s more, an IC-DISC shareholder will get to treat any distributions, as well as any taxable income from export receipts exceeding $10 million, as taxable dividend income at the qualified dividend tax rate. If the IC-DISC doesn’t pay dividends to shareholders, an interest charge applies to the deferred tax.

Interested in learning more? For general information, visit IRS.gov. If you want to find out how an IC-DISC may benefit you and your organization, give RBT CPAs a call. We can help you determine whether your organization qualifies for IC-DISC and, if so, what the potential benefits could be. Give us a call to learn more.