In a prior article, I described what an IC-DISC is and the tax advantages available to exporters in using them. At the end of the article, I mentioned that these benefits were set to expire at the end of 2012. As part of averting the "fiscal cliff", Congress extended the IC-DISC benefits, although changes in tax rates beginning January 1, 2013 have somewhat diminished the tax savings. Specifically, instead of having the IC-DISC's distributions taxed at 15% as in the past, that rate will only be available for taxpayers in the 25-35% individual tax bracket, and a 3.8% Medicare Surtax will be added, for a minimum rate of 18.8%. Tax filers with an AGI greater than $400,000 to $450,000, depending on filing status, will be subject to a 20% qualified dividend tax rate in addition to the 3.8% surtax for a total of 23.8%.

With the new tax rates, below is a chart illustrating the tax benefits of using an IC-DISC for someone in the highest federal income tax bracket:

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 39.6% rate

$633,600

Less: Tax Paid on IC-DISC Commission Distributed as Dividend at 23.8% rate

$380,800

Net Tax Savings

$252,800

The end result is that instead of a $320,000 tax savings in 2012, the tax savings in 2013 will only be $252,800 under the same circumstances. Even with the diminished tax savings, the amount is great enough to justify the costs of creating an IC-DISC for many exporters.

This blog is not intended to create an attorney/client relationship or provide legal advice. Please contact the author if you have any questions or comments regarding the subject matter.