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IC-DISCs: A Funny Name for a Great Tax Benefit

There was a time when your customers were your neighbors. Then they were in the town down the road. Before long, you were doing business with people from a different state. Now, many of you are doing business overseas, or contemplating it. For those of you in the global marketplace, the U.S. tax code may have a nice benefit for you.

While the Interest Charge Domestic International Sales Corporation (IC-DISC) has been around for almost 30 years, it was not very popular until the mid-2000s when dividends were changed from ordinary income tax rates to capital gains tax rates. Even after that change, many people have taken a wait-and-see approach since the tax rate decrease was only temporary. Now that the dividend tax rates are not scheduled to increase, the IC-DISC should definitely be explored for companies exporting their products.

While there are a couple different ways to benefit from an IC-DISC, the way we see the most is for a company to effectively pay a tax-deductible dividend/distribution. This is accomplished by having the operating company pay a commission on export sales to the IC-DISC, with that commission being deductible by the operating company. The IC-DISC does not have to pay tax on the commission it receives; instead it distributes the money to its shareholders in the form of a dividend. The dividend is taxable to the shareholders at capital gains rates of 0% to 20%, while the commission generated a deduction at ordinary income rates of 15% to 39.6%. For instance, a $100,000 commission run through an IC-DISC can generate tax savings of roughly $20,000.

You’re probably thinking it must be really complex or risky in order to get these tax savings. Actually, the IC-DISC is nothing more than a paper corporation, funded with $2,500 of capital, and with a requirement to annually calculate the commission on export sales and file a separate tax return. It really is that simple. For compliance costs of maybe $2,000 per year, you may be able to get tax savings of many multiples of that amount.

An IC-DISC can make sense for any company exporting at least $500,000 per year of products it manufactures here in the United States. Even some companies with lower exports can benefit from an IC-DISC if their export sales are highly profitable. If your company has export sales, we would be glad to talk about an IC-DISC with you.