Articles

August 6, 2015

Are you Taking Advantage of IC-DISC Tax Benefits for Exporting?

If you are an exporter, IC-DISC is worth taking notice of — especially under current economic conditions resulting from a strong U.S. Dollar. The acronym stands for Interest Charge – Domestic International Sales Corporation, and small- to medium-size American exporting companies can take advantage of this tax classification to their advantage.

The dollar’s strength is not an advantage for sellers of U.S. goods. In fact, it’s just the opposite — an economic reality that makes your job more challenging. However, your thin profit margins could be expanded by accessing the tax benefits offered by this poorly understood tax deduction. Every little bit counts, and the advantages offered by IC-DISC might be substantial. Several companies have earned federal tax reductions of 40 percent, adding up to seven-figure annual tax savings.

While your company might not be as large as those firms, your federal tax reduction may approach the 40 percent mark others have earned as a result of attaining IC-DISC status. 

The facts

The IC-DISC entity classification has been around for a while, but many U.S. exporters have failed to take advantage of the opportunity, or aren’t even aware that they qualify. That is in part because it’s so simple to take the deduction that there’s often little incentive for certain tax strategy promoters to bring it to business owners’ attention.

All your business has to do is create a separate entity — the IC-DISC — without disturbing the current structure of your company or in any way disrupting existing customer relationships. The IC-DISC is a tax-exempt domestic corporation set up to receive the commissions from your company on its export sales. It must have its own bank account, keep separate accounting records and file its own U.S. tax returns.

The allowable portion of your company’s gross receipts is passed to the IC-DISC corporate entity, which is owned by your company’s shareholders. Commission payments are then taxed at the dividend income rate of 20 percent, rather than at the federal corporate income tax level, which can be as high as 39.6 percent.  

Simplicity is key

Many businesses never bother to pursue potential tax breaks, either because they are unaware of them or because dealing with the red tape of the IRS just seems like a hassle. However, this classification is fairly simple to establish and maintain. An IC-DISC entity can generally be set up regardless of the tax structure of your company. It’s relatively inexpensive to create, and nothing changes in the day-to-day operation of your business.

When most people think of exports, they think of solid goods. However, your business can qualify even if the goods it sells overseas can’t be seen. Intellectual property such as software and architectural and engineering services can be exported, too, and are also eligible for this tax savings.

“Components in finished products” is another eligible category of exportable products that is often overlooked. For example, if a manufacturer of fan belts were selling overseas, the company would qualify under the tax code as long as the finished product contained no more than 50 percent of foreign content. However, it would also qualify if, instead of being shipped directly overseas, the part was installed in an American car built and assembled in the U.S. for offshore markets.

While the set-up may sound confusing, the paperwork is fairly simple. Consult your tax professional to iron out the details and begin realizing significant tax savings. 

Chris Colyer is a tax partner at Wiss & Co. Contact him at ccolyer@wiss.com or (973) 994-9400.

To read further about IC-DISC, find another one of Chris' informative posts here.