IC-DISC

• 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.

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 an effective tax savings and planning tool.