IC-DISCs are one of the few tax benefits provided by the tax code specifically for exporters. IC-DISC's can be used by any company that 1) directly exports the goods that it manufacturers; 2) provides services that are conducted outside of the U.S.; or 3) manufactures goods that are part of a final product that is exported.
To qualify as an IC-DISC, a domestic corporation must pass the following two tests:
- 95% of the gross receipts of the IC-DISC must constitute qualified export receipts.
- 95% of the assets of the IC-DISC must be qualified export assets.
There are other tests, but these provide a good idea of whether further consideration is warranted.
An IC-DISC is a domestic corporation that makes the election to be a IC-DISC with the IRS. For state purposes, it is simply a domestic corporation. It is neither a s-corp or a c-corp. Note that s-corporations are ineligible to be IC-DISCs.
The basic process for using an IC-DISC is as follows:
- An exporting company (Export Co.) creates an IC-DISC. Use IRS form 4876-A to do this.
- Export Co. pays the IC-DISC a commission based on Export Co.'s export sales, at the rate of the greater of 50% of net export income or 4% of export gross receipts. The IC-DISC needs to be in place prior to the export sales at issue.
- The commission is deductible by Export Co.
- The IC-DISC distributes its commission revenue as dividends at 15% tax rate, but has no corporate level tax.
Here is an example of how the use of an IC-DISC could impact the bottom line.
The following example show the benefit of paying tax at a 15% rate instead of a 35% rate:
Export Gross Receipts | $40,000,000 | |
Less: Cost of Goods Sold | $32,000,000 | |
Gross Margin | $8,000,000 | |
Less: Selling, General and Admin. Exp. | $6,000,000 | |
Export Sales Income | $2,000,000 | |
50% Export Sales Income | $1,000,000 | |
4% Export Gross Receipts | $1,600,000 | |
Maximum IC-DISC Commission (greater of the two) | $1,600,000 | |
Tax Savings on Commission at 35% rate | $560,000 | |
Less: Tax Paid on IC-DISC Commission Distributed as Dividend at 15% rate | $240,000 | |
Net Tax Savings | $320,000 |
As you can see, the bottom line tax benefit is $320,000 in this example.
The IC-DISC rules are set to expire on December 31, 2012, and there is no assurance that these tax benefits will continue at all, much less to the same extent. In addition, there are a significant number of rules and regulations pertaining to IC-DISC's, so please consult a business or tax attorney if you want to learn more.
