ARTICLE | January 10, 2025

 An interest charge domestic international sales corporation (IC-DISC) can be a powerful tax-savings opportunity for many companies exporting goods that have been manufactured, produced, grown or extracted domestically. The IC-DISC incentive was created in 1971 to provide tax incentives to domestic companies engaged in foreign exports. The beauty of the IC-DISC structure is that capturing the tax benefits is straightforward and minimal changes are needed in the operations of the business. Additionally, the structure is invisible to the customers of the company.

Implementing an IC-DISC

Implementation of a typical IC-DISC structure does not affect how the exporter deals with its customers and suppliers. An IC-DISC requires the formation of a domestic corporation, an initial tax election, a bank account, minimal capital and requires the filing of an annual federal tax return. There are no restrictions on who can be a shareholder of an IC-DISC. In a typical arrangement, the shareholders of the IC-DISC mirror the shareholders of the operating company. Shareholders can be C corporations, S corporations, limited liability companies, trusts, individuals or any combination.

Benefits of an IC-DISC

Permanent Tax Savings on Export Sales

An IC-DISC effectively converts ordinary business income into qualified dividend income to provide permanent tax savings. The permanent tax savings are generated by an operating company paying a deductible commission payment to an IC-DISC. This commission is calculated as the greater of 4% of the operating company’s gross foreign export sales or 50% percent of the operating company’s net foreign export income, not to exceed 100% of net foreign export income. The IC-DISC is a tax-exempt entity and pays no tax on receipt of the commission.

The IC-DISC has the option of paying this commission payment to its shareholders as a qualified dividend. The rate of permanent tax savings is the difference between:

► The shareholder’s ordinary income tax rate (currently at maximum rate of 37% or 29.6% net of the section 199A deduction);
► And the shareholder’s income tax rate on qualified dividends (currently at a maximum rate of 23.8%).

Deferral of Income Taxes

If certain qualifications are met, the IC-DISC can retain the commission payment and distribute it to its shareholders in a later tax year. Operating companies with foreign exports less than $10 million annually can defer the distribution of the commission payment to the IC-DISC shareholders thus deferring tax on
the amount that would be a qualified dividend to its shareholders. In these cases, the shareholder is required to pay an interest charge on the amount of deferred tax savings.

Make Dividends Paid by a C corporation Tax-deductible

Provided that a C corporation has sufficient net foreign export income, dividends can be made in the form of a commission to an IC-DISC and subsequent dividend to shareholders, creating in effect a tax-deductible dividend

Facilitate Succession Planning

An IC-DISC can be used to generate cash in a tax- advantaged manner for shareholders for purposes of facilitating a buyout of current or previous shareholders. The shareholders of an IC-DISC do not necessarily have to be the same shareholders of the operating company.

IC-DISC Structure

Most IC-DISCs are arranged as a commission IC-DISC. In this structure the IC-DISC receives a commission from an operating company with qualifying foreign exports. The IC-DISC’s only activity is generally the receipt of this commission and subsequent dividend to the shareholders of the IC-DISC.

The two most common variants of this structure are:

1) Where the shareholders of the operating company are themselves the shareholders of the IC-DISC
or
2) The operating company itself is a shareholder of the IC-DISC.

The following page includes a visual representation of the IC-DISC structure.

If you would like to discuss setting up an IC-DISC for your company, please give us a call.