Tax Savings of an IC-DISC
An Interest-Charge Domestic International Sales Corporation (IC-DISC) is a separate corporation which acts as a sales commission agent for businesses exporting goods outside of the United States. Previously, we talked about the benefits of an IC-DISC and those companies who qualify. Now we will dive deeper into the mechanics and tax calculations of an IC-DISC.
To determine the tax savings, the first step is calculating its commissions:
- 50% of export net income
- 4% of qualified export gross receipts (limited to export net income)
Generally you will want to choose the larger of the two amounts for the maximum tax benefit.
Let’s analyze the saving with an example. Parent company (S-Corporation) has qualified foreign gross receipts of $20 million with net foreign taxable income of $1 million. The first method gives us a commission of $500,000 (50% x $1 million), and the second gives us a commission of $800,000 (4% x $20 million). In this scenario, we would choose the second method which results in an $800,000 commission paid by the parent company to the IC-DISC.
The parent company pays the $800,000 commission to the IC-DISC and in return lowers taxable income. In the largest tax bracket, this would produce gross tax savings of $316,800 (39.6%) for its shareholders. The IC-DISC distributes the commission as a qualified dividend to its shareholders which produces a tax liability of $190,400 (23.8%). This results in a permanent net tax savings of $126,400 for the shareholders.
Contact an Anders advisor to determine if an IC-DISC is right for you and your company.