Architects, the IC-DISC and Marginal Costing

Architectural and engineering firms can qualify for IC-DISC benefits, but only for a narrow category of foreign-project services. The governing rule is that gross receipts for engineering or architectural services are qualified export receipts only if the services relate to construction projects located, or proposed for location, outside the United States. Those receipts can help satisfy the 95% gross-receipts test under section 992(a)(1)(A). However, these services are not “export property” sales, so they do not fit within the marginal costing regime that applies to section 994 transfer-pricing computations for export property transactions. [2] [3] [5]

Statutory framework

An IC-DISC is generally exempt from entity-level income tax. Section 991 provides that a DISC is not subject to the taxes imposed by subtitle A. To qualify, section 992(a)(1) requires, among other things, that at least 95% of the corporation’s gross receipts be qualified export receipts and that at least 95% of its assets be qualified export assets. [1] [3]

Section 993(a)(1)(G) includes within qualified export receipts gross receipts for engineering or architectural services for construction projects located, or proposed for location, outside the United States. The Form 1120-IC-DISC instructions restate this rule and explain that qualifying receipts include feasibility studies, design and engineering, and general supervision of construction for foreign projects, but not services connected with mineral exploration. [2] [5]

For these purposes, “United States” includes Puerto Rico and U.S. possessions. So the project must be outside that expanded definition of the United States to qualify under section 993(a)(1)(G). [2]

How architects and engineers qualify

Architects and engineers do not qualify because they export “property.” They qualify because Congress separately treated certain foreign-project services as qualified export receipts. That distinction matters.

To fit within section 993(a)(1)(G), the key elements are:

• the taxpayer must have gross receipts from engineering or architectural services; [2]
• the services must relate to a construction project; [2] [5]
• the project must be located, or proposed for location, outside the United States. [2]

The instructions specifically identify qualifying examples such as feasibility studies, design and engineering, and general supervision of construction for projects abroad or proposed to be abroad. They also specifically exclude services connected with mineral exploration. [5]

These receipts are reported on Form 1120-IC-DISC, Schedule B, line 2c. [5]

Qualified export assets and operational support

Section 993(b)(2) also treats as qualified export assets used primarily in connection with the performance of engineering or architectural services described in section 993(a)(1)(G). That is important for the separate 95% qualified-export-assets test in section 992(a)(1)(B). In other words, not only can the service receipts qualify, but assets primarily used in performing those foreign-project services can also count as qualified export assets. [2] [3]

Why marginal costing does not apply

These services do not qualify for marginal costing. The sources tie section 994 intercompany pricing to transactions involving export property and certain related commission, lease, and service arrangements. Regulation section 1.994-1(b)(4) allows section 994(a)(1) or (2) to apply where engineering or architectural services for foreign construction projects are furnished by a related supplier and the DISC acts as principal or commission agent. But the marginal costing rules are prescribed separately under Regulation section 1.994-1, which states that section 1.994-2 contains the marginal costing rules authorized by section 994(b)(2), and those rules are framed around export property pricing computations rather than section 993(a)(1)(G) service receipts. [4]

Consistent with that structure, the Form 1120-IC-DISC instructions discuss intercompany pricing for sales of export property and direct taxpayers to Schedule P for those computations. The instructions do not extend marginal costing treatment to engineering or architectural services. [5]

So, while engineering and architectural receipts can be qualified export receipts, they are not eligible for the marginal costing benefit associated with export property transactions under section 994(b)(2). [4] [5]

Filing and qualification implications

For an architecture or engineering firm using an IC-DISC structure, the practical qualification points are:

• the IC-DISC must still satisfy the general section 992 requirements, including the 95% gross-receipts and 95% asset tests; [3]
• only receipts from engineering or architectural services tied to foreign construction projects qualify; [2] [5]
• mineral exploration services do not qualify; [5]
• those receipts are reported on Schedule B, line 2c of Form 1120-IC-DISC; [5]
• although section 994 pricing rules may apply to related-party service arrangements, the marginal costing rules do not apply to these engineering and architectural services. [4] [5]

In short, architects and engineers can qualify for IC-DISC benefits when they earn receipts from engineering or architectural services for construction projects outside the United States or proposed for foreign location. Those receipts are expressly treated as qualified export receipts, and related operating assets can qualify as qualified export assets. But the benefit is limited to that statutory service category, and those services do not qualify for marginal costing. [2] [3] [4]

Cited Sources

1. Sec. 991 Taxation of a domestic international sales corporation
2. Sec. 993 Definitions and special rules
3. Sec. 992 Requirements of a domestic international sales corporation
4. Sec. 1.994-1  Inter-company pricing rules for DISCs.
5. Instructions for Form 1120-IC-DISC (12/2025)