What is an IC-DISC?
IC-DISC is an acronym for Interest
Charge – Domestic International Sales Corporation. It is the last
remaining export incentive available to U.S. exporters. It has been
around in its current form since 1984, but did not become popular until
the Jobs and Growth Tax Relief Reconciliation Act of 2003 lowered the
capital gains tax rate making it much more attractive for exporters.
It is a domestic 'paper' entity that
does not require employees, offices, or tangible assets. To be an
IC-DISC, a corporation must be organized under the laws of a State or
the District of Columbia and elects to be treated as an IC-DISC and is
governed under Internal Revenue Code §§991-997.
Which Companies Qualify?
The different entity types that can use
the IC-DISC include flow-through entities (S-Corps, partnerships, LLCs,
etc.); and closely-held C-Corps. It's important to note that you do not
have to be the manufacturer of any products to take advantage of
IC-DISC – you qualify if you export domestically produced products
The industries that have taken advantage of IC-DISC include:
- Software Companies
- Engineering/Architectural firms working on buildings/structures in
IC-DISC is only viable and valuable to the shareholders if the following criteria apply:
- Minimum annual gross export revenues of $2,000,000 (direct or indirectly)
- Minimum annual net export revenues of $500,000 (direct or indirectly)
- Significant tax liability on current or projected revenues
What are the benefits? An IC-DISC Example
Step #1: The exporting
company creates a tax-exempt IC-DISC. The IC-DISC is a "paper" entity
that does not require office space, employees, or tangible assets. In
this example, the IC-DISC is set-up under the ownership of the
individual shareholders of the exporting company.
Step #2: The exporting
company pays the IC-DISC a commission. The IC-DISC commission may be
determined as the greater of 50% of export net income or 4% of export
gross receipts. The commission may be increased even more in certain
Step #3: The exporting
company deducts the commission amount paid to the IC-DISC from its
ordinary income taxed at 35%. The commission income for the IC-DISC is
deferred from current taxation.
Step #4: When the IC-DISC pays dividends to its shareholders, the shareholders pay dividend income tax, currently at a rate of 15%.
Step #5: The net effect is a 20% tax savings on the IC-DISC commission.