IC-DISC Dividends and Schedule K-2/K-3

Quick Update: IC-DISC Dividends and Schedule K-2/K-3

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Taxpayers utilizing an IC-DIS should note the continuing importance of Schedules K-2 and K-3 in reporting international income. Since 2022, S corporations and partnerships receiving IC-DISC dividends must include this information to comply with the requirements of Schedule K-2/K-3.

Although IC-DISCs are domestic entities (Treas. Reg. § 1.992-1(a)(1)), dividends paid by an IC-DISC are classified as foreign-source income under Treas. Reg. § 1.904-4(b)(3) and Rev. Rul. 73-68. These dividends fall under the ‘specified passive category’ for foreign tax credit purposes.

If your IC-DISC is owned by an S corporation or partnership, be sure to reflect the foreign-source nature of the dividends on Schedules K-2 and K-3 to avoid potential issues with the IRS.

Author

  • Paul Ferreira, CPA, is the President and founder of Export Tax Management (ETM), which he established in 2008 after over ten years of experience in international tax. Recognizing a need for specialized expertise in the Interest Charge-Domestic International Sales Corporation (IC-DISC), Paul focused ETM’s services on helping businesses maximize their tax savings through this unique export incentive. With over 25 years of experience, Paul leads a team of skilled CPAs based in Boston, MA, providing expert IC-DISC advisory to companies across the U.S.

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