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Using An IC-DISC To Lower Taxes

By MarksNelson on October 27, 2015 in Articles, International Tax, Manufacturing Distribution, Sara Stubler CPA, Tax

Manufacturers and distributors who export products should consider the use of an interest charge domestic international sales corporation (IC-DISC) to reduce their tax burden. Here are some frequently asked questions about this strategy.

How does it work?

An IC-DISC is a separate entity that earns a “commission” on the operating company’s export sales based on the greater of 1) 50% of net income on sales of qualified export property or 2) 4% of gross receipts from sales of qualified export property. A properly executed IC-DISC isn’t taxable at the entity level. So, the operating company receives a deduction for the commission paid at ordinary tax rates and the IC-DISC pays no tax.

The IC-DISC distributes all of its profits as qualified dividends, and the owners pay tax on the dividends at more favorable capital gains tax rates. Depending on the owners’ personal income levels, federal capital gains tax rates could be as low as zero or 15% — or as high as 23.8% (the highest federal capital gains rate of 20% plus an additional 3.8% of net investment income tax).

How much federal tax can it save?

To illustrate, let’s suppose Widgets, Inc. (a fictional S corporation) ships $2 million internationally and pays $80,000 in commissions to its IC-DISC. Assuming the owners qualify for the highest capital gains tax rate of 23.8%, they’ll owe federal tax of $19,040 on qualified distributions from the IC-DISC.

However, the owners also owe less tax on their S corporation earnings. Widgets can deduct $80,000 in commissions paid to the IC-DISC, resulting in a tax savings of $31,680, assuming that the owners are in the highest federal tax bracket of 39.6%.

The net savings is $12,640 ($31,680 – $19,040), or 15.8% of the commission charge. It’s often possible to pay a higher commission using the 50% of net export income calculation, however.

What steps are required?

A properly executed IC-DISC strategy follows these procedures:

1.      Form the new IC-DISC entity under state law.

2.      Make the IC-DISC election within 90 days of formation.

3.      Offer only one class of stock with par or stated value of stock of at least $2,500.

4.      Maintain a separate set of books and records for the IC-DISC.

Taxpayers also can establish the IC-DISC in a domicile without state income tax to eliminate the need to file state income tax returns.

Potential for big return on investment

The potential tax savings can outweigh the costs of creating and administering an IC-DISC. If you export a significant amount of products, discuss this strategy with your  tax advisor today. Please contact your MarksNelson advisor at (816) 743-7700 if you have any questions or would like more information.


Sara Stubler


About the Author

MarksNelsonView all posts by MarksNelson
MarksNelson LLC works with clients to help safeguard and grow their businesses. Our ultimate goal is to help our clients to Move Forward. The firm provides Assurance, Accounting Services and Business Advisory, Business Valuation, Consulting, Cost Segregation, Employee Benefit Plan Audits, Litigation Support, Forensic Accounting, International Tax, State and Local Tax and Tax planning, advisory and compliance services. MarksNelson is a member of The Leading Edge Alliance, the second-largest international professional association of independently owned accounting and consulting firms, serving clients who need additional resources on a national or international level. MarksNelson has significant accounting and business advisory experience in the auto dealership, construction, insurance, manufacturing, distribution and real estate sectors. The firm was named among the 2014 Best Accounting Firms for Leadership Equity by the 2014 Accounting MOVE Project for its dedication to gender equity.