An Interest Charge Domestic International Sales Corporation, or IC-DISC, provides a permanent tax savings opportunity for qualifying U.S. exporters. An IC-DISC is not a tax shelter. It’s an incentive specifically provided by the tax code that allows U.S. exporters to increase their ability to compete globally by reducing U.S. tax liabilities. It is a paper entity designed solely for the purpose of realizing export tax savings.
Benefits of an IC-DISC
- Creates permanent tax savings on the export sales commission
- Increases liquidity for shareholders or businesses
- Supplies ongoing financing to reduce cost of capital
- Creates a tax-advantaged vehicle for succession or estate planning
- Eliminates double taxation for C-Corporations and defers taxes
How Does an IC-DISC Work?
- An IC-DISC creates permanent tax savings by transferring income from the exporter to the tax exempt IC-DISC through an export sales commission.
- The IC-DISC commission payment reduces the exporter’s taxable income, thus reducing tax liability by the marginal tax rate of the commission amount.
- An IC-DISC commission is taxed at the qualified dividend rate when distributed to shareholders as dividends.
- The transfer of income to the IC-DISC creates a permanent tax rate arbitrage on the export sales commission.
Impact of TCJA
The Tax Cuts and Jobs Act made no changes to the way an IC-DISC operates, but the introduction of the new qualified business income deduction (QBID) for pass-through entities and foreign-derived intangible income (FDII) for C-Corporations has reduced the overall IC-DISC benefit. When looking at an IC-DISC held by a pass-through entity, the 20% QBID has established an effective marginal rate as low as 29.6%. If paired with the highest qualified dividend rate of 23.8% (20% long-term capital gains + 3.8% Net Investment Income tax), the savings of an IC-DISC benefit is approximately 5.8%. The QBID is scheduled to sunset in 2025 but until then, an IC-DISC remains an effective tax savings tool although pass-through entities will need higher export sales volume and taxable income as compared to previous years.
With C-Corporations, the rate reduction to 21%, coupled with the new ability to deduct 37.5% (the 37.5% is reduced to 21.875% for taxable years after 2025) of a C-Corp’s FDII, can result in a tax rate as low as 13.125%. However, it is important to factor in the impact of double taxation with a C-Corporation. A shareholder receiving a dividend from the company is subject to the qualified dividend tax of 23.8% in addition to the initial C-Corporation tax. The benefit of utilizing an IC-DISC enables the taxpayer to avoid the initial C-Corporation tax, as an IC-DISC commission is an ordinary business expense and results in what is effectively a deductible dividend. Regardless of entity type, an IC-DISC can still be utilized as a great tax savings and planning tool.
How McGuire Sponsel Can Help
McGuire Sponsel’s approach is designed to minimize the filing and maintenance burdens for our clients while maximizing commissions and tax savings. We evaluate all commission alternatives on an annual basis, including performing a detailed transaction-by-transaction analysis. Choosing the optimal methodology and performing a detailed annual analysis will ensure maximum savings.
What Makes a Great Prospect?
– Manufacturer or distributor of qualified export property
– Export sales revenue in excess of $2.5 millionLet's Talk
- Case Study
- White Papers
Automotive Component Part Manufacturer Case Study
McGuire Sponsel identified an opportunity for a Kentucky-based company that machines automotive and heavy truck parts. The LLC had approximately $5.5 million in annual revenue, including about $2.6 million in international sales.
IC-DISC Planning for 2018
This webinar will discuss the basis of an IC-DISC, what qualifies as an IC-DISC export, and what to focus on in order to maximize the IC-DISC in the current environment. Upon completion of this webinar, participants will be able to:
-Discuss IC-DISC basics
-Understand the IC-DISC qualifications of a true export
-Address areas to maximize the IC-DISC benefit
Roth IRA planning and your IC-DISC
In December 2018, the Court of Appeals for the Second Circuit ruled in favor of the Taxpayer, approving a Roth IRA structure that would enable Roths to accumulate several million dollars in just a few years. Now that the Second Circuit has approved this structure, the strategy to use you IC-DISC as a means of funding of your Roth IRA without limitation looks more secure than ever.