Benefits of an IC-DISC
IRS offers large tax incentives for manufacturers who export their product internationally. An Interest-Charge Domestic International Sales Corporation (IC-DISC) is a separate corporation which acts as a sales commission agent for the exporting entity. The election must be made within 90 days of its first taxable year by filing IRS Form 4876-A. It is categorized as a domestic C corporation that is tax-exempt from federal income tax purposes.
To qualify as an IC-DISC you must meet the following tests:
- At least 95% of its gross receipts during the tax year are qualified export receipts.
- At the end of the tax year, the adjusted basis of its qualified export assets is at least 95% of the sum of the adjusted basis of all its assets.
- It has only one class of stock, and its outstanding stock has a par or stated value of at least $2,500 on each day of the tax year.
- It maintains separate books and records.
- It is not a member of any controlled group of which a foreign sales corporation (FSC) is a member.
- Its tax year must conform to the tax year of the principal shareholder who has the highest percentage of voting power.
- Its election to be treated as an IC-DISC is in effect for the tax year.
Typically ownership is held by the pass-through entity for greatest tax benefit. The parent company pays a commission to the IC-DISC and deducts this commission from its ordinary business income. This results in a deduction at ordinary tax rates, with the current highest bracket of 39.6% in tax savings. The IC-DISC receives the commission as income, but does not pay federal taxes since it is a tax-exempt organization. The IC-DISC then distributes this cash as a dividend to its shareholders. The dividend is taxed at the qualified dividend rate, with the current highest rate being 23.8% including the additional net investment income surtax. This results in a net permanent 15.8% tax savings (39.6% tax savings – 23.8% tax costs). The IC-DISC may also choose not to pay a dividend to its shareholders. In this scenario an interest charge would apply to the deferred tax which is where the IC-DISC received its name.