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An IC-DISC is a special-purpose U.S. corporation that encourages domestic companies to export their products or services. Acting as a sales commission agent to the export company, an IC-DISC entity will receive a commission annually, which is exempt from federal income tax.

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IC-DISC FAQs: Maximizing Export Incentives

What is an IC-DISC, and how can it benefit businesses?

An IC-DISC is a special-purpose U.S. corporation that encourages domestic companies to export their products or services. Acting as a sales commission agent to the export company, an IC-DISC entity will receive a commission annually, which is exempt from federal income tax. When properly established and maintained, this structure can offer significant tax advantages, including:

  • Potentially converting a portion of export-related income into qualified dividend income taxed at lower rates (for individual shareholders)
  • Deferring some tax on export income until funds are repatriated or other triggering events occur
  • Potential continued deferral of income if utilizing Producer Loans

What are the eligibility requirements for businesses to create and utilize an IC-DISC?

U.S. manufacturers typically benefit from an IC-DISC structure, but before proceeding, it’s essential to determine whether the export activities meet the criteria outlined in IRC Section 993.

The Three Tests for Qualified Export Sales:

  • Manufacture Test—Export property must be manufactured, produced, grown, or extracted in the U.S.
  • Foreign Content Test—Up to 50% of the fair market value of the export property can be attributable to imported content
  • Destination Test—The export property must be held primarily for sale/lease/ultimate consumption permanently outside the U.S.

How is an IC-DISC entity set up, and what are the compliance requirements?

Setting up an IC-DISC involves:

  • Forming a new U.S. corporation under applicable state law
  • Ensuring the new corporation issues a single class of stock and meets the minimal required capitalization of $2,500, including maintaining its own bank account
  • Filing Form 4876-A with the IRS before the 90th day of the tax year for which the IC-DISC treatment is sought

Ongoing compliance includes:

  • Maintaining accurate records of export sales and related transactions
  • Filing annual tax returns (Form 1120-IC-DISC) timely
  • Ensuring the IC-DISC continues to meet the 95% export receipt and 95% export asset tests

Failure to satisfy these requirements can lead to the loss of IC-DISC status, so working with experienced tax professionals is highly recommended.

Can a business benefit from an IC-DISC even if most of its sales are domestic?

Yes. Although an IC-DISC primarily rewards export activity, even a modest level of international sales can yield tax savings. This structure can be especially advantageous for companies looking to grow their export division.

Can an IC-DISC be established for a subsidiary or joint venture, or does it have to be with the primary business entity?

An IC-DISC can be set up in coordination with various business structures (subsidiaries, joint ventures, etc.) as long as it meets the required tests and filing obligations. Strategically, some companies form IC-DISCs to handle export sales across multiple related controlled entities.

Can businesses continue to operate an IC-DISC if there are changes in ownership or restructuring?

Yes. Ownership transitions or restructuring do not automatically invalidate the IC-DISC, provided the entity continues to meet statutory conditions and keeps its filings current. Consult with a tax professional when making changes to ensure the IC-DISC remains compliant and fully operational.

Contact McGuire Sponsel’s Global Business Services team for any questions on IC-DISC or other international tax issues.

Megan Han is a Tax Consultant in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services.

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