Are you an exporter of American-made goods? If so, an interest-charge domestic international sales corporation (IC-DISC) can help slash your tax bill.
An IC-DISC is a "paper" corporation that is formed in the US to receive commissions on export sales and elects to be so treated. The commissions generally equal the greater of 4% of gross export receipts or 50% of export profits. Your business deducts the commission payments as ordinary trade or business expenses, while the profits of the IC-DISC are taxed (or deferred) at favorable rates.
An IC-DISC is not subject to US federal income tax. Instead, the business owners pay tax on dividends received from the IC-DISC. For individuals, these dividends are taxed at favorable capital gains rates (limited to 23.8%). Essentially, an IC-DISC allows business owners to convert ordinary income into low-taxed dividends.
In addition to the benefits of low rates on dividends, the tax on IC-DISC taxable income of up to $10 million per taxable year can be deferred. The business owner pays an interest charge on the deferral at a modest interest rate.
The flexibility allowed for IC-DISC ownership structures can provide compensation, estate, and retirement planning opportunities. There are also a variety of rules that provide additional benefits that require additional effort.
For certain exporters and manufacturers, a properly structured IC-DISC can provide big tax breaks.
Questions? If an IC-DISC might fit your business needs, please contact us.
Hal Zemel, a Tax Principal at Berdon LLP, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.