IC DISC Export Incentive
Closely held companies exporting products and certain services may be able to take advantage of the IC DISC provisions of the Internal Revenue Code. The IC DISC provisions are a tax incentive created by Congress to facilitate export sales. IC DISCs were originally used as tax deferral mechanisms. The creation of the qualified dividend rate changed the role of an IC DISC from a tax deferral mechanism to a mechanism that could achieve a 20 percent permanent tax savings.
How can an S-Corporation generate a permanent tax savings of 20 percent?
A new corporation is formed and an election to be treated as an IC DISC is filed. The IC DISC is normally owned by the S-Corporation or has ownership similar to the S Corporation. The IC DISC and S-Corporation enter into a commission agreement for export sales. The S-Corporation pays a commission to the IC DISC based on qualifying export sales revenue equal to the greatest of 50 percent of net income or 4 percent of sales.
The S Corporation is able to deduct the commission paid to the IC DISC from ordinary income which would be taxed to the shareholders at 35 percent. The IC DISC is tax exempt and doesn't pay tax on the commission income received. When the IC DISC pays a dividend back to the S-Corporation it is flowed through to the shareholders and taxed to them at 15 percent, thus resulting in a permanent tax savings of 20 percent on the commission paid to the IC DISC.
Can a C-Corporation also generate a permanent tax savings of 20 percent?
Yes, a C-Corporation can also generate a permanent tax savings of 20 percent. Using an IC DISC with a C-Corporation works very similar to the S-Corporation example above except for the fact that the IC DISC would have to be owned by individuals to take advantage of the 15 percent qualified dividend rate.
What products or services qualify for the IC DISC?
There is a complex set of rules which outlines qualifying export sales revenue. Examples of qualifying export sales revenue include but are not limited to:
- Gross receipts from the sale of "export property"
- Manufactured, produced, grown or extracted in the U.S.
- Held primarily for sale, lease or rental for consumption or disposition outside the U.S.
- Not more than 50 percent of the fair market value of which is attributable to articles imported into the U.S.
- Gross receipts from the lease or rental of export property which is used by the lessee outside the U.S.
- Gross receipts for engineering or architectural services for construction projects located outside the U.S.
My corporation has qualified products or services - now what?
Call your Meaden & Moore representative immediately to discuss setting up an IC DISC to take advantage of the 20 percent permanent tax savings. In addition to the items discussed above, there are numerous technical requirements that need to be met to establish an IC DISC as well as multifaceted calculations that will maximize the IC DISC commission under the 50 percent taxable income method.
If you have any questions, or would like more information please contact your Meaden & Moore representative or Marne Babich at (216) 241-3272 or firstname.lastname@example.org.