As a business owner, you want to be sure you are taking advantage of every potential tax savings opportunity. One such opportunity is for those businesses which export items that are 50 percent or more manufactured in the U.S. If you meet that requirement, you may qualify for as much as 6% to 19% in tax savings by setting up a separate business entity called an Interest Charge Domestic International Sales Corporation (IC-DISC). IC-DISCs can work with C-corps, S-corps, LLCs and partnerships. The Tax Cuts and Jobs Act's more favorable ordinary tax rates reduced the benefit of the IC-DISC, though there is still a beneficial rate differential.
An IC-DISC is a straightforward legal set-up in which the rate differential between ordinary income tax deductions and qualified dividend income can result in savings for your profitable business. Here’s how it works:
- As a separate tax-free legal entity, the IC-DISC acts as a selling agent for your operating business in foreign countries
- The IC-DISC earns a commission from the operating company for selling your products to foreign customers; any income is earned tax-free
- Sales commissions paid to the IC-DISC are tax deductible to the operating business
- Dividends paid to shareholders are taxed at a favorable 20% dividend rate
- Only minimal annual maintenance costs
- Profits may be accumulated for estate planning
- Income can be shifted to lower tax bracket taxpayers
- Most IC-DISCs are “paper” companies meaning they are not required to have employees or office space—just separate books and records.
Examples of Qualifying Companies
- Company manufactures goods in Missouri and ships them to Canada
- Company manufactures a good that is included in an exported product
- Distributor sells U.S. made products going outside the U.S.
- Company provides architectural or engineering services that are conducted in the U.S. for a building or bridge built outside of the U.S.
- Software provider with sales outside the U.S.
Keep in mind that while export sales count, goods that are reimported as part of an assembled package do not. However, if your product is a component that you sell to a distributor, as long as that distributor sells the final product to a foreign country, you can still take advantage of the tax savings afforded through the IC-DISC.
Don’t miss out on an excellent opportunity for tax savings. There are a number of complex rules on how to compute sales commission, so you will want to check with an expert to ensure you are maximizing your tax benefit.
For more information, please contact your MarksNelson professional at 816-743-7700.