When closely-held C corporations utilize an Interest Charge – Domestic International Sales Corporation (“IC-DISC”), it is fairly common to deal with deferred DISC income. This occurs when the IC-DISC chooses not to distribute income to its shareholder(s) but instead, retain it as accumulated IC-DISC income. As a result, this creates a situation upon which an interest charge is calculated based on the shareholder’s DISC related deferred tax liability.
In 1984, the DISC rules were changed to provide that shareholders of a DISC could continue to defer tax on its income but only if they paid interest on that deferred tax. It was at this point the “IC” portion of the “IC-DISC” came into being. As such, IRC § 995(f)(1) states “A shareholder of a DISC shall pay for each taxable year interest in the amount equal to the product of – (A) the shareholder’s DISC-related deferred tax liability for such year, and (B) the base period T-bill rate.” Therefore, the shareholder(s) of an IC-DISC must pay an interest charge on any DISC related deferred tax liability existing with respect to the taxable year of that shareholder.
The interest charge is computed by the shareholder(s) of an IC-DISC and reported by filing Form 8404. This two-page form utilizes a simple calculation that must be completed and filed by the due date of the federal income tax return. Additionally, the computed interest charge must be paid by the due date of the federal tax return.
In summary, shareholders of closely held C corporations may choose to defer DISC related income to reduce their current tax liability. Although they will have to pay an interest charge on the deferred tax liability, the interest charge itself tends to be minuscule given the minimal base period T-bill rates. In fact, the base period T-bill rate factor for 2016 is just .005414566. Therefore, utilizing the IC-DISC is still a feasible avenue to defer income and distribute it in a taxable year that may be more advantageous to the taxpayer.