One of the last available ways that exporters can reduce their taxable income and improve their cash flow is by creating an interest charge domestic international sales corporation (IC-DISC).
The IC-DISC is nothing new and has been around for quite a while. Though the TCJA made significant changes to the tax legislation, it did not change much in regards to IC-DISC, so it is still a viable option for exporting companies.
Today, more and more companies are becoming involved in foreign transactions and global trade, including exporting, but many are unaware of the tax benefits that an IC-DISC can provide.
So, why would you want an IC-DISC, and how exactly can it benefit your company? Let’s take a step back and review the basics.
What is an IC-DISC, and how does it work?
An IC-DISC is a tax incentive set up for companies that produce goods here in the United States with the ultimate destination being outside of the United States. There are many requirements to using an IC-DISC that need to be taken into consideration such as the exported property must be manufactured in the U.S. with at least 50% of U.S. materials and/or labor cost and also must be shipped overseas to foreign customers (delivering to a port with the ultimate destination being outside the U.S. also works).
It is a separate U.S. “paper company” that is set up and owned by the exporter’s shareholders or by the operating company itself. The operating company pays commissions to the IC-DISC, which are then deductible by the exporter for income tax purposes. The IC-DISC actually pays no income tax but is required to give a dividend to the owners. That dividend is then taxed to the owners of the IC-DISC at 23.8%.
In short, the main benefit behind an IC-DISC is that you can get a deduction that provides a much lower tax rate on your export sales.
Did the TCJA change anything in regards to the IC-DISC?
Before the Tax Cuts and Jobs Act went into effect, taxpayers could reduce their tax rate by as much as 19.6%. After the new tax law was passed, the benefit has been limited to 5.8% because of the reduction in tax rates and the 20% deduction for pass-through entities.
Although IC-DISCs are now less beneficial, they can still create significant tax-saving opportunities and be worth your time in pursuing.
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