Does your company export American made products internationally?
Is your current tax rate higher than 15 percent?
If the answer to these questions is yes, you may be eligible for a tax incentive designed to reward the exporting of American-made products. That tax incentive is known as the “Interest Charge Domestic International Sales Corporation,” more commonly referred to as an “IC-DISC.”
The main benefit of the IC-DISC is it gives a taxpayer the ability to convert income that would normally be taxed as ordinary income to income taxed at a potentially lower qualified dividend tax rate.
Numerous types of businesses qualify for this incentive and may not even realize it. If your answer to the questions above was yes then the IC-DISC should certainly be on your radar. An IC-DISC can be used by owners of C Corporations, as well as owners of pass through entities (partnerships and S Corporations). Businesses from software developers to cruise ship operators can be eligible for the incentives provided by an IC-DISC.
The original introduction of the DISC entity came about in 1971 under President Richard Nixon but the present day version of the IC-DISC was created in 1984. From 1984-2003, the structure of the tax rates did not create a major savings by utilizing the IC-DISC.
However, when the dividend rates were lowered in 2003 - and made permanent in 2012 - the use of an IC-DISC became much more popular and effective in tax planning. There are both “buy/sell” DISCs and “commission” DISCs. For purposes of this posting we are focusing on the use of commission DISCs.
The mechanics and formation of IC-DISC can be complicated but the overall strategy is that the exporting company (“ABC, Inc.”) creates a subsidiary (the IC-DISC). ABC, Inc. would then calculate a commission based on approved IRS formulas and pay that commission to the IC-DISC. The commission is eligible for a deduction by ABC, Inc. at ordinary rates and is not subject to income tax (under IRC Sec 992) as income to the IC-DISC.
The IC-DISC then sends the monies to the shareholders of the IC-DISC as a qualified dividend subject to the lower rates. So in essence, ABC, Inc. gets a tax deduction at ordinary income rates, the IC-DISC does not have to pay tax on the commission it receives and the monies come back to the owners as qualified dividend income.
While there are some formation, record-keeping and technical rules that have to be followed, the use of an IC-DISC can provide a significant tax savings to eligible taxpayers.
This article is not intended to lay out all of the rules, but rather to give broad strokes of how this particular tax incentive can help local companies. If you are interested in discussing this tax incentive, we would be glad to do so.
Chad Wouters, CPA joined Earney & Company in December 2006 and became the tax partner in November 2013. With an emphasis on strategy and planning, Chad works with his clients all year to ensure the most efficient tax strategies are put into place. Earney & Company, L.L.P. is a CPA firm that handles tax compliance, consulting and planning as well as audit and other assurance services. For more information please visit www.earneynet.com or call (910) 256-9995. Chad can also be reached at [email protected].
Christina Haley O'Neal - Oct 23, 2020
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