IC-DISC an Underused Tax Saving Strategy for U.S. Exporters

February 23 2016 | by Mike Wilhelm, CPA

Is your company one of the many in the United States that is experiencing a rapid increase of exported goods? Exporting creates an opportunity to use a tax savings strategy by creating an Interest Charge – Domestic International Sales Corporation (IC-DISC). Not just for large C-Corporations, an IC-DISC applies to small/medium pass-through entities as well. If your company’s export revenue averages $1 million per year and/or is projected to be growing in the future, you should explore how an IC-DISC can result in a significantly lower tax bill for your organization.

In an upcoming series of blogs we will take an in-depth look at why you should consider an IC-DISC, including set up strategies, R&D impact, and common pitfalls.

Let’s get started…

What is an IC-DISC?

An IC-DISC is a separate legal entity that elects IC-DISC tax status. This creates the opportunity for a company to convert ordinary income into dividend income. In high-income earners, this typically converts 39.6% income into 23.8% income. A key point is that this is a permanent tax savings which gives the IC-DISC a unique benefit over many other tax opportunities. When you are discussing strategies such as method of accounting or recurring item exception, these are only deferring taxable income to a different year. But if an IC-DISC saves $20,000 in tax dollars, that is money left directly in your pocket or invested back into the business, and – oh yeah – all else being equal, that is an extra $20,000 saved every year!

So who and what exactly qualifies?

Anyone can set up an IC-DISC, but there is a cost benefit that needs to be analyzed. We like to tell clients that if they are exporting goods or services, having that IC-DISC conversation with us doesn’t cost anything. As mentioned previously, if exporting revenue nears $1 million, or exporting is a potential strategy, then an IC-DISC analysis is a necessity.

The types of produced goods in the U.S. that qualify include, but are not limited to:

  • Manufacturers
  • Farmers
  • Distributors
  • Architectural and Engineering companies
  • Software companies

Better yet, the company producing these goods does not have to be the direct exporter. If the goods are produced and the end purchaser is in a foreign country, the goods can travel through a U.S.-based distributor. In the case of a distributor, both the manufacturer of the goods and the distributor can set up an IC-DISC, and both can get tax benefits from the same goods.

Want to know more?

Keep a lookout for more information about this topic as Stambaugh Ness continues to dive deeper into the different components, strategies, and issues associated with an IC-DISC.

Can’t wait?? Stambaugh Ness’ Strategic Tax Advisory and Planning Group and our International Business and Tax Advisory Group are ready to assist with IC-DISC and all your tax needs. An IC-DISC needs to be carefully analyzed to maximize the benefit and strategic goal of a company, complete proper tax filings and elections, and make sure documentation and procedures are in place.

Stambaugh Ness works side-by-side with its clients to ensure compliance and assist understanding the purpose, benefits, and goals associated with IC-DISC and all tax strategies.

Leave a Reply

Your email address will not be published. Required fields are marked *