The fourth quarter is an essential time for clients and CPAs to explore year-end tax planning opportunities. For exporting companies, this is the perfect time to examine whether or not it would be beneficial to establish an Interest Charge – Domestic International Sales Corporation (IC-DISC). Given the prospective nature of an IC-DISC, timing can play a critical role in maximizing tax savings.
By utilizing an IC-DISC, a U.S.-based company can reduce its federal tax liability by converting its export sales income, which is taxable at ordinary income rates, into qualified dividends, taxed at capital gains rates. Generally this creates an effective tax savings of 15 percent – 18 percent.
Since the IC-DISC is not retroactive, we commonly see companies wait until the end of the year to incorporate. Typically this is a successful strategy with the aim to maximize the tax benefit for the subsequent year. However, there may be cases when a company could benefit from the immediate establishment of an IC-DISC.
As an example, McGuire Sponsel and a partnering CPA firm identified an IC-DISC opportunity for a chemical manufacturer in the beginning of November. McGuire Sponsel was able to help set up the IC-DISC by Nov. 15, 2015. By establishing the IC-DISC before year-end, the company was able to capitalize on its $3.5 million of export sales that took place before Dec. 31. As a result, the client had a commission of approximately $450,000 that generated a tax benefit around $71,000.
If a company is planning to have significant export sales in the remaining months of the year, it may not be too late to take advantage of a short tax year IC-DISC. If a company is better suited to establish an IC-DISC to take advantage of 2017 export sales, it is still a great time to begin year-end planning projections and analysis. Regardless of the situation, don’t hesitate to let us know if you have an IC-DISC opportunity.