Foreign Sales Could Provide Big Tax Breaks
The IRS provides a tax incentive for small and medium manufacturers that export their products overseas. These manufacturers should consider forming an Interest Charge Domestic International Sales Corporation or IC-DISC for short.
Here’s how it works:
An IC-DISC is set up as a separate entity. Annually the manufacturer pays a tax deductible commission to the IC-DISC up to the greater of 1) 4% of the manufacturer’s gross receipts from qualified exports or 2) 50% of the net income from qualified exports. Since the IC-DISC is a tax-exempt, the company does not pay taxes on these commissions. When the IC-DISC distributes the commission income out to their shareholders, these are taxed as qualified dividends. The result is the manufacturer converted income taxed at ordinary income rates of 35% to qualified dividends that are currently taxed at 15%–that’s a 20% tax break! If the income is not paid out to the shareholders in a given year, there is interest charge that is calculated on the deferral and is reported to each shareholder.
How does a company qualify?
The requirements to qualify as an IC-DISC are fairly simple:
- Must be incorporated in one of the 50 states;
- File an election with the IRS to be treated as an IC-DISC;
- Maintain a minimum capitalization of $2,500;
- Have only a single class of stock; and
- Meet the qualified export receipts test and a qualified export assets test (95% of the gross receipts and assets of the IC-DISC must be related to the export of property)
Every manufacturer that has annual foreign sales should consider an IC-DISC. These entities are easy to establish and the tax benefits could be substantial.