As the end of the year approaches, CPAs generally experience a spike in IC-DISC incorporations. This seasonal activity is understandable as clients want to have everything set-up and ready to go in order to maximize the IC-DISC’s prospective tax benefits for the upcoming year. Concurrent with these new incorporations comes the question of how to best structure the shareholder ownership of the IC-DISC. In its most basic form, there are two ownership structures that are utilized based on the exporting company’s entity type.
The simplest ownership configuration for an IC-DISC comes when the exporting company is organized as a flow-through entity, an S corporation or an LLC. In this case, the IC-DISC is directly owned by the exporting S corporation or LLC as a subsidiary and the required movement of cash can flow in a complete circle back to the exporter. Under this scenario, at the end of the year the S corporation or LLC pays a commission to its IC-DISC subsidiary, and as soon as 24 hours later the IC-DISC subsidiary can pay those funds right back to the exporting parent in the form of a qualified dividend:
The other ownership structure utilized is where the exporting entity is a C corporation. This type of ownership structure is a classic brother/sister arrangement. Unlike the ownership structure of an S corporation or LLC, several Tax Code restrictions make direct C corporation ownership of an IC-DISC undesirable. But, both the C corporation and the IC-DISC could be owned by the same shareholders. In this type of structure, the C corporation will pay the deductible commission to the IC-DISC, thereby reducing its ordinary income, and the IC-DISC in turn pays that out to its shareholders in the form of a qualified dividend. Unlike the flow-through example discussed above, the money distributed to the shareholders as a qualified dividend permanently leaves the C corporation under this arrangement. However, the exporter has still effectively created a deductible dividend to the C corporation shareholder:
Whether the exporting company is structured as an LLC, S corporation or C corporation, McGuire Sponsel is involved at the onset of the incorporation process to assist with realizing the optimal IC-DISC ownership configuration needed to maximize the IC-DISC tax benefit.
Call us if you need insight or assistance in discussing the establishment of an IC-DISC and the pros/cons of a respective ownership structure, or if you have an IC-DISC currently established and would like to discuss optimization.