IC-DISC: A Big Tax Break for Exporters

To help jump-start exports from U.S. businesses to markets overseas, Congress established a tax-saving program known as the Interest Charge-Domestic International Sales Corporation, or IC-DISC, back in the 1970s. Recent tax law changes have focused renewed attention on IC-DISC as a smart strategy for any closely held company that sells products or services overseas.

IC-DISC can be utilized by all types of business entities, including regular corporations, partnerships, LLCs and S corps. The net result of forming an IC-DISC? Possible income tax reductions of 50 percent or more on export profits.

An IC-DISC is a special tax-advantaged company that is separate from the core business itself, but usually owned by the same shareholders. Upon making an export sale, the exporter would calculate a commission from the sale to be paid to the IC-DISC and take a deduction for this commission, which is not subject to income tax. The calculations are based on several alternative statutory methods, and are similar to the ones used in the popular Extraterritorial Income Exclusion (EIE) and Foreign Sales Corporation (FSC) programs.

Since IC-DISCs may only have a small amount of cash on hand at year-end, most will choose to make dividend distributions of the commission directly to shareholders. These distributions will be taxed as qualified domestic dividends, generally subject to maximum federal income taxes of 15 percent.

This requirement may prove burdensome for some cash-flow sensitive companies. However, there are several capital retention strategies that would enable these companies to retain all or some of the commission in operations, thus easing the cash flow crunch.

The potential tax-saving opportunities presented by IC-DISC make it worth a close look by any U.S. exporter. The details, however, can be complex, which makes consultation with a CPA or tax advisor critical.

To discuss the potential benefits of IC-DISC to your company in more detail, please contact our office.