During the economic recovery after the bubble burst in 2008, the United States designed a special incentive to strengthen US manufacturing to encourage exports.
Many businesses are still not aware of, what could be, the best tax break. The Interest-Charge Domestic International Sales Corporation (IC-DISC) is at the forefront of the underutilized incentives. you may be wondering what an IC-DISC is and why your business should be taking advantage.
IC-DISC is a tax code provision which allows companies a chance to reduce their tax by up to 50% on half of their export income. This is done by businesses designing multiple or separate entities which the company pays sales commission.
The exporters are able to deduct those commissions to the exported. Commissions are considered dividend payments to shareholders/partners. The dividend taxable rate is 15% versus paying the profit out as wages. When paid out as wages, the taxable rate is 37.5%. The IC-DISC is a tax-exempt body.
The result of an IC-DISC is permanent tax saving. Companies are able to defer taxes on profits from export sales left of up to $10 million. Due to the benefit of this exchange, companies only pay a small interest fee tied to the T-Bill rate.
Are You Eligible for and IC-DISC?
There are three guidelines your corporation needs to follow to qualify as an IC-DISC.
Are you a direct exporter of goods? in other words, if your company manufactures a product in Charleston, SC and ships to Mexico, you are eligible for and IC-DISC. Products exported can include agricultural products, software and more.
Are you an architectural firm or an engineer with international clients? You are eligible if your company creates designs within the United States, used by builders outside of the United States.
Are you a manufacturer whose product is a part of an exported product? If you manufacture brake pads included in vehicles which are then shipped, you are eligible.
The product which is being exported must have been manufactured in the United States.
The IC-DISC must be a C corporation, as its profits are taxed separately from the owner, and it must be organized in the United States.
Your corporation must always have a single class of stock with no less than $2,500 outstanding par value at all times.
Setting up an IC-DISC
The Interest-Charge Domestic International Sales Corporation (IC-DISC) is, in essence, a “paper” corporation that does not need employees, assets or offices.If you have a company that meets the requirements listed above, you can elect to be treated as an IC-DISC. You must keep separate books, bank accounts and records. The most important rule to remember, 95% of the assets claimed by the IC-DISC must be qualified export assets and 95% of its gross receipts have to be qualified export receipts.
Although this tax incentive sounds as though it is too good to be true, it is completely legit. If your business falls within the guidelines of eligibility listed above, your next move should be to set up a meeting with your tax advisor to discuss an IC-DISC.