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IC DISC

There are few tax incentives remaining for U.S. based companies doing business in foreign markets. Over the past few years, Congress has repealed or not renewed lucrative incentives. However, for companies that export goods to foreign markets, there is a little known tax incentive which can offer compelling benefits. The incentive knows as the Interest Charged – Domestic International Sales Corporation (IC-DISC) offers qualifying companies a substantial tax savings opportunity. BCG & Company works with exporters across Ohio and the Midwest assessing, establishing and administering IC-DISCs. Our professionals have worked with dozens of companies to help them transition to this tax efficient structure.

What is an IC-DISC?

An IC-DISC is a company permitted by statute designed to receive commissions on export sales. It functions as a subsidiary or an affiliate of your existing company and thus there are several administrative issues that need to be addressed such as opening separate bank accounts, establishing separate accounting records and tax returns. Below is a list of summary information on the structure, qualification and operation.

Eligibility

The IC-DISC is available to all types of entities, including partnerships, LLCs, regular corporations, and S corporations.  It is most beneficial to closely-held pass-through entities, whose owners can take advantage of the tax rate reduction on qualified dividends.

 In addition, the company must also satisfy several other requirements including:

  • A  single class of stock with an aggregate minimum par value of $2,500;
  • 95% of gross receipts involve goods manufactured in the U.S.;
  • 95% of the assets of the IC-DISC is inventory for export ;
  • Separate records are maintained by the IC-DISC; and
  • The IC-DISC is not a member of a foreign sales corporation.  

Generally speaking, the following industries have taken advantage of IC-DISC:

  • Manufacturers
  • Distributors
  • Software Companies
  • Engineering/Architectural Firms - Working on Structures in Foreign Countries

IC-DISC Operation

The mechanics of how an IC DISC operates are somewhat complex. A summary level explanation of how the tax savings is realized by the shareholders is outlined below.

  • SAMPLE Company forms a tax-exempt IC-DISC;
  • SAMPLE Company pays a commission to the IC-DISC based upon a determined rate;
  • SAMPLE Company deducts the commissions from its ordinary income taxed at marginal rate…highest which is 39.6%;
  • The IC-DISC pays no tax on the commissions because it is tax-exempt;
  • The IC-DISC distributes dividends to its shareholders which are taxed at the capital gains rate of marginal cap gain rate…highest which is 20% ;
  • The resulting tax savings is approximately difference between ordinary rates and cap gain rates of the commissions paid compared to the dividend received. This is a permanent tax savings. 
  • As long as dividends receive preferred tax rate treatment as is the case under the current U.S. tax structure, an IC-DISC is a viable strategy

IC-DISC Analysis

While this structure is attractive for many companies it is important to have an analysis conducted to ensure the new structure will deliver the benefits expected. Our professionals will conduct a review of your company to assess key factors that include entity structure, inventory assessment qualifying export sales, annual estimates and related compliance costs. IC-DISCs can also be used as an Estate Planning vehicle as well as a structure used to incentivize key employees and owners. Leveraging this information we are able to determine not only the immediate benefits but also project bottom line value to your company for an extended period. 

Contact Us

Interested in learning more about IC-DISCs and determining how your company may be able to benefit? Establishing an IC-DISC is a complex process that is best left to providers with experience in this area. For additional information on IC-DISC’s, please contact BCG & Company at 330-864-6661, or click here to contact us. We look forward to hearing from you.

 

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