IC-DISC benefits are one of the primary reasons businesses file for this corporate structure change. As a company branches into international sales, the tax incentive can hold over money that can be spent on warehousing, product development, and more.
What are the benefits of IC-DISC?
IC-DISC tax benefits include tax deferrals, estate-planning aids, reduced federal tax payments, and increased capital. In the interim, the corporation can use the money to grow its business by hiring new staff, expanding warehousing, or developing new products and services.
This guide will delve into the benefits a corporation can take advantage of when electing as an Interest Charge DISC. You’ll also learn about eligibility requirements and how to implement IC-DISC status with professional assistance.
Overview of IC-DISC
The Interest Charge Domestic International Sales Corporation or IC-DISC is a tax incentive for United States-based corporations that export products internationally.
The United States Congress created the IC-DISC tax benefits in 1971 to encourage more American businesses to expand internationally. Corporations registering as an Interest Charge DISC can take advantage of the aforementioned advantages (which we’ll explain more shortly) within the next tax year.
Corporations considering implementing an IC-DISC should understand the ins and outs of the process and the incentives they’re eligible for. This will maximize their federal income tax savings.
Export Tax Management Inc. are IC-DISC specialists. Our services cater to businesses seeking implementation and incorporation, including IC-DISC-related supplier agreement preparation and filing IRS Form 1120-IC-DISC.
The 11 Most Important Benefits of IC-DISC
Here is a full overview of IC-DISC tax benefits, including examples to help your corporation understand why implementing IC-DISC status can further business goals and cement your business as one of the top in your industry.
1. Reduced Tax Liability
Corporations of all sizes have tax liability, referring to what they must pay the IRS. If your C corp or S Corp can implement an IC-DISC, you can drastically reduce your tax liability.
How so? IC-DISCs are not required to pay taxes on generated commission income. Instead, the dividend payments go to the IC-DISC’s shareholders.
Here’s an example. Your operating company pays a commission to your Interest Charge DISC, at least four percent of your gross receipts from qualified exports. Alternatively, you can pay at a rate that’s 50 percent of your net income on qualifying exports.
2. Increased Cash Flow
If your company implements an IC-DISC, you can significantly reduce your federal income taxes, which can increase your company cash flow, using the cash however your corporation sees fit.
You may decide to hire new staff to meet the production demands of your rapidly expanding business. You might also lease or buy a larger warehouse or upgrade your production equipment.
You can also use the additional cash flow toward R&D, reducing time between new products and services. You could expand your marketing and advertising campaigns, keeping your native and international audiences engaged.
3. Competitive Advantage
Implementing an IC-DISC gives your corporation a competitive advantage.
If you’re in an especially competitive industry, such as biotechnology, architecture, or engineering, your business must do all it can to get a leg up so you don’t lose business to your competitors.
Interest Charge DISC benefits can help you gain that competitive advantage in several ways. First, by expanding internationally, you’ll already grow your presence in a way many of your competitors likely aren’t.
As mentioned, you can use the extra cash flow to expand your marketing campaigns, increasing your name awareness. You could focus on SEO to increase your rank and generate more traffic to your website over the competition.
You can also introduce higher-quality products and services than your competitors, increasing your audience and cementing their loyalty.
4. Increased Access to Capital
Cash flow is an important consideration for businesses of all sizes. The additional capital you’d access through your IC-DISC tax incentives can open many business doors, as described.
For example, you can reduce federal income tax payments. You also don’t pay a full rate on the commission payments.
Your dividends are taxable to your Interest Charge DISC shareholders at 23.8 percent, a 3.8 percent net investment income tax rate, and a 20 percent capital gains tax rate.
5. Tax Deferral
One of the top IC-DISC tax benefits is tax deferral. Corporations can take out producer’s loans, allowing the corporation to access its undistributed profits from exported goods and services.
A producer’s loan is a loan not exceeding five years. Only the shareholders or members of your corporation based in the US are eligible to take out a producer’s loan. The loan cannot surpass the corporation’s IC-DISC income.
Further, the limit on loans is determined by multiplying these numbers and tallying up the sum:
- The aggregate of experimental and research expenditures by a percent ratio of gross receipts from past years or receipts for three years ahead of the latest tax year for all leases and sales that are considered export property.
- The amount in rentals, leases, and sales to customers.
- The amount spent on support, equipment, machinery, and warehouses for production facilities.
While deferring IC-DISC taxes increases the money in a corporation’s pocket now, the deferred taxes acquire interest. Your corporation must carefully determine the right time to pay the tax amount.
6. Ability to Expand Globally
Global expansion was ultimately Congress’s goal in creating IC-DISC benefits. As US-based companies strive to grow their presence, innovation wins, as the race to create better products and services will lead to many amazing creations.
Your corporation can reach a larger global talent network willing to increase your workforce and improve your products and services. Your revenue potential grows with your corporation’s size, as does your reputation.
Eligibility and Qualifications for IC-DISC Benefits
Your corporation must qualify to reap IC-DISC tax benefits. Here are the eligibility requirements:
- Your corporation implements an IC-DISC by electing IC-DISC status on Form 4876-A. The form is due within 90 days after the incorporation of your IC-DISC. Keep in mind the election continues unless and until your corporation revokes it.
- Your corporation must pass an asset test, with at least 95 percent of the generated assets for that tax year meeting the criteria as export assets. Most export assets are receivables or commission revenue. Other examples are assets connected to servicing, assembling, packaging, transporting, handling, storing, or selling exported products or services.
- Your corporation must pass a gross receipts test, where the rate of qualifying exports from commissions should be 95 percent or higher. A qualifying export must be produced in the US, with the overall rate of production and manufacturing occurring in the country at up to 50 percent.
- You must only have one stock class.
- Your IC-DISC’s stock must be valued at $2,500 or higher throughout the tax year.
- Your Interest Charge DISC must file Form 1120 IC-DISC.
- Your IC-DISC must maintain separate financial records.
- You must file tax returns for the Interest Charge DISC and corporation separately.
Documentation is at the core of electing for IC-DISC status. Holding onto paperwork throughout your corporation’s term as an Interest Charge DISC ensures maintained eligibility and compliance with the requirements.
Understanding IRS Form 1120-IC-DISC
Has your corporation decided to proceed with Interest Charge DISC status to take advantage of the IC-DISC benefits?
Download and print IRS Form 1120-IC-DISC, the Interest Charge Domestic International Sales Corporation Return. The form consists of various sections, including:
- Schedule A, Cost of Goods Sold
- Schedule B, Gross Income
- Schedule C, Dividends, Inclusions, and Special Deductions
- Schedule E, Deductions
- Schedule J, Deemed and Actual Distributions and Deferred DISC Income for the Tax Year
- Schedule L, Balance Sheets Per Books
- Schedule M-1, Reconciliation of Income Per Books With Income Per Return
- Schedule M-2, Analysis of Other Earnings and Profits
- Schedule M-3, Analysis of Previously Taxed Income
- Schedule M-4, Analysis of Accumulated IC-DISC Income
- Schedule N, Export Gross Receipts of the IC-DISC and Related U.S. Persons
- Schedule O, Other Information
You must also file Form 4876-A, Election To Be Treated as an Interest Charge DISC.
If you hire a professional to assist with IC-DISC implementation, you should select an advisor based on their expertise and experience. They should have a proven track record of assisting corporations registering as Interest Charge DISCs, such as Export Tax Management Inc.
Read more about what our clients have to say, or fill out our contact form today to get your IC-DISC implementation underway.
Why Export Tax Management?
Export Tax Management Inc. is your choice for maximizing IC-DISC benefits for your corporation. Our years of experience assisting businesses becoming elected Interest Charge DISCs make our services a trusted choice for your corporation.
You need the guidance of a professional as you make this business decision, and we’re here to help.