The interest-charge domestic international sales corporation (IC-DISC) is one of the last remaining opportunities that can provide tax incentives for exporters. Historically, IC-DISCs have been used primarily by private companies, but public companies shouldn’t overlook this potentially significant tax break available through the creation of such a corporation. A properly structured and operated IC-DISC allows companies to defer taxes on as much as $10 million in export sales.
How it works
An IC-DISC is a “paper” corporation that serves as a sales commission agent for a U.S. exporter. To qualify, the corporation doesn’t need to have employees, offices or tangible assets. However, it must:
- Be a C corporation organized in the United States,
- Have a single class of stock,
- File an election to be treated as an IC-DISC,
- Maintain a separate bank account,
- Keep a separate set of books and records, and
- Maintain a minimum capitalization of $2,500.
Additionally, and most important, 95% of an IC-DISC’s assets must be qualified export assets (QEAs) and 95% of its gross receipts must be qualified export receipts (QERs).
QEAs include export property, necessary working capital, commissions receivable and certain other export-related assets. Qualified “export property” is property that’s manufactured or produced in the United States, with at least 50% U.S. materials and sold primarily for use or consumption outside the country. QERs include receipts from export property sales, leases of export property and engineering and architectural services for construction projects outside the United States.
The exporting company generally pays tax-deductible commissions to the IC-DISC up to the greater of 4% of the IC-DISC’s gross receipts from qualified export property sales or 50% of the IC-DISC’s net income on those sales. The IC-DISC itself is generally tax-exempt.
The main tax benefit of an IC-DISC for companies is the ability to defer income taxes on profits from up to $10 million in export sales left in the IC-DISC. To obtain this benefit, the exporting company must pay a modest interest charge tied to the T-Bill rate (currently, a fraction of 1%).
Another tax benefit? Closely held companies have an opportunity to realize permanent tax savings by converting ordinary income used to pay commissions into lower-taxed qualified dividend income.
Worth a look
U.S. public companies with substantial exporting income should consider setting up an IC-DISC. These entities are inexpensive to establish and maintain and the tax-deferral benefits typically far outweigh the costs.