Interest Charge – Domestic International Sales Corporations (IC-DISC) serve as conduits for tax savings on qualified export sales.
Here’s how an IC-DISC works:
- Midsized exporting company forms a corporation (i.e., the IC-DISC), which generally mirrors the ownership structure of the exporting company.
- The IC-DISC charges the exporting company a commission on qualified export sales.
- The exporting company fully deducts the commission expense.
- The IC-DISC distributes profits to its shareholders via dividends
- U.S. income tax is imposed on the IC-DISC shareholder’s dividends.
Instead of the exporting company paying up to a 35 percent corporate tax, the tax burden (related to the commissions paid) falls to IC-DISC shareholders, who pay a 15 percent individual tax rate. Because of the reduced 15% dividend tax rate on individuals, taxpayers realize a 20 percent tax savings. In effect, this allows businesses to more than double their tax savings on qualified export sales.
No employees are required within the IC-DISC and the entity has no effect on exporting operations. Also, an IC-DISC may be established at any time during the year. IC-DISCs are particularly well-suited for midsized companies because individual shareholders — not companies — will benefit from the tax rate reduction.
Written by Scott Henkel, CPA | Partner
Posted in Tax