Potential Impact of QBI Deduction Expiration on
IC-DISC Tax Savings

Introduced in the 2017 Tax Cuts and Jobs Act (TCJA), the qualified business income (QBI) deduction was designed to provide tax relief to small and pass-through business owners by allowing them to deduct up to 20% of their qualified business income on their federal taxes. Originally intended to level the playing field between pass-throughs and C corporations, it now faces expiration if not extended before 2025.

Whether or not Washington will decide to extend QBI or to let it expire remains uncertain. The QBI deduction is a pricey policy to keep in effect, with an estimated cost of $700 billion. It will be interesting to see how Congress handles discussions around extension in the coming year, but for now, it seems that QBI will expire as scheduled after 2025.

What does this mean for pass-through-owned IC-DISCs? An IC-DISC benefit for pass-through classified ownership is realized through the reclassification of ordinary income to qualified dividend income. With both NIIT and QBI currently in effect, the arbitrage rate in 2024 stands at 5.8%. Should QBI expire as scheduled, this could increase significantly. For a breakdown of the current arbitrage calculation and the potential arbitrage rate following the sunset of QBI, please see below:

With the potential arbitrage rate rising from 5.8% to 13.2%, the IC-DISC structure may offer enhanced tax savings through the reclassification of ordinary income to qualified dividend income, thereby allowing business owners to retain more of their hard-earned profits. As discussions around the QBI deduction’s future unfold, pass-through entities should consider evaluating the benefits of establishing an IC-DISC now to prepare for a potential shift in the tax landscape. Ultimately, whether or not the QBI deduction is extended, the opportunity for greater tax efficiency through IC-DISC may emerge as a critical strategy for those looking to navigate the complexities of U.S. tax law.

If you would like to know more about whether your business qualifies for an IC-DISC benefit or would like guidance on other international tax considerations, please get in touch with McGuire Sponsel’s Global Business Services team.