Tax Incentives for Exporters

Tax Incentives for Exporters – Maximize Savings with IC-DISC and FDII

/in /by

Tax incentives for exporters allow United States-based corporations exporting to foreign countries to increase their savings and lower their tax liability. The goal of these incentives is to maximize foreign exports. What are tax incentives to exporters, and how do they work?

The primary US-based tax incentives for exporters are the Interest Charge Domestic International Sales Corporation (IC-DISC) and Foreign Derived Intangible Income (FDII). An IC-DISC is a separately formed business entity that makes a commission on certain export sales. The federal tax rates are lower when those payments are distributed as qualified dividends.

This guide to export incentives will explain your options in more detail, the expected tax benefits and other advantages, and how to begin reaping tax savings.

Overview of Tax Incentives for Exporters in the USA

Two cargo ships exporting goods from the United States, benefiting from tax incentives for exporters.

According to the International Trade Administration, the US already exports $2 trillion in services and goods worldwide but can always afford to expand.

That’s why Congress created the IC-DISC in 1971. That’s not the only tax incentive for US corporations with foreign presences; FDII is another popular option.

Export Tax Management Inc. specializes in IC-DISC incorporation, compliance, and implementation. Explore your tax incentive options with our services.

The Types of Tax Incentives for Exporters in the USA

Here’s an overview of the tax incentives exporters can take advantage of:

Tax Credits

Tax credits allow taxpayers to deduct a specific amount by the dollar from their federal income taxes. Businesses pay less money on their taxes as a result. Tax credits can be partially refundable, fully refundable, or nonrefundable.

A refundable or partially refundable tax credit generates a refund according to the prescribed amount. States and the federal government will make tax credits available to qualifying businesses.

Tax Deductions

Accountant calculating tax deductions for her exporter client using International Sales Corporation (IC-DISC) tax incentives.

Another type of tax incentive exporters should consider is a tax deduction. Businesses can subtract a sum from their taxable income, paying less on their taxes. Types of deductions include itemized or standard deductions.

You subtract the amount due by taxable income, and thanks to The Tax Cuts and Jobs Act, the amount of standard deductions is higher than ever

Some deductions small businesses and startups are eligible to claim on their tax returns are as follows:

  • Startup expenses
  • Vehicle costs
  • Property, sales, and local taxes
  • Maintenance and repairs
  • Pass-through tax deductions
  • Loan interest
  • Regulatory and licensing fees
  • Professional and legal fees
  • Insurance
  • Equipment
  • Bad debts
  • Marketing and advertising
  • Business travel

Tax Exemptions

Exporters should also consider their tax exemption eligibility. A tax exemption reduces the corporation’s tax obligation. Municipal, county, and state governments offer exemptions.

IC-DISCs and other tax-exempt organizations can also reduce their federal income tax rate.

Tax incentives share many similarities in how they reduce a corporation’s taxes owed. However, the different ways incentives lower taxes and the eligibility criteria make it worth a corporation’s time to thoroughly explore deductions versus credits versus exemptions, especially as they apply to IC-DISC and FDII.

Learn more about the differences between these two tax incentives for exporters in our article.

Want to explore how tax exemptions and incentives like IC-DISC can benefit your business?

At Export Tax Management Advisory Firm, we specialize in IC-DISC and can help you navigate exemptions, deductions, and credits to maximize your tax savings and boost your bottom line. Reach out to us for a consultation today!

Why the IC-DISC Is the Best Choice as a Tax Incentive

IC-DISC stands head and shoulders over FDII and other tax incentives for exporters eager to claim more tax savings. An IC-DISC is a Congress-issued tax incentive and tax code that broadens the scope of US sales in foreign countries and opens the door to exporting.

Eligible companies must establish an IC-DISC separate from their main entity, with it operating as a tax-exempt entity without office space or employees. The exporter or shareholders must form the IC-DISC, with a required delineation between it and C corporations.

When the corporation makes an international sale, it owes the IC-DISC a commission. The commission is deductible as a business expense. No federal income taxes are owed until the IC-DISC begins paying owner dividends.

The dividends have a tax rate of only 23.8 percent.

When should a corporation consider applying for IC-DISC status? Seek this tax benefit if a high tax rate has impeded business growth. Export Tax Management Inc. can help you determine the right road to tax savings and incentives for your business.

Contact us today to determine if IC-DISC status is right for you.

IC-DISC Tax Returns: Credits and Deductions

Accountants are reviewing client form 1120 for IC-DISC tax returns.

According to Schedules C and E of IRS Tax Form 1120, qualifying corporations can make the following deductions:

  • Freight insurance and freight
  • Contributions
  • Interest
  • Licenses and taxes
  • Bad debts
  • Employee benefit programs
  • Profit-sharing plans and pensions
  • Maintenance and repairs
  • Officer compensation
  • Warehousing
  • Sales commissions
  • Rent
  • Wages and salaries
  • Advertising and market studies
  • Nonqualified inclusions and dividends
  • Qualified dividends
  • Total inclusions and dividends
  • IC-DISC dividends (including former DISCs)
  • Global Intangible Low-Taxed Income or GILTI
  • Inclusions from controlled foreign corporation sales, in which a lower-tier foreign corporation’s stock was sold
  • Dividends from foreign sources where the foreign corporation owns at least 10 percent but is not a hybrid corporation
  • Dividends from wholly-owned foreign subsidiaries
  • Dividends from foreign corporations with less than, equal to, or more than 20 percent owned
  • Dividends on certain preferred stocks from public utilities that are less than or more than 20 percent owned
  • Dividends from foreign or domestic corporation debt-financed stock
  • Dividends from foreign corporations that are less than or more than 20 percent owned outside of debt-financed stock

Maximizing your IC-DISC is simple with the right support, such as from Export Tax Management Inc. For example, a bakery that produces goods in the US but sells them internationally would qualify for IC-DISC status, lessening its tax burden.

Advantages of Joining the IC-DISC Tax Incentives for Exporters

Establishing an IC-DISC allows corporations to begin reaping the following advantages.

Delaying Taxes by Waiting to Pay Dividends on the Commission

While corporations under DISC status must still file taxes within nine months from the end of their tax year and by no later than the 15th day (unless that day falls on a weekend or holiday), when the corporation has to pay taxes under this tax incentive isn’t always the same.

A corporation can wait until it generates $10 million of export sales before paying the commission as a dividend. This limit resets every year.

Spending Less Money on Taxes

Tax advisors analyzing strategies to maximize tax incentives for exporters and reduce tax liabilities.

Corporations don’t want to spend more than necessary on their taxes, as the loss in capital can trickle down to other parts of the company. A bad tax year might cause a corporation to tighten its belt, reduce staff, or make other changes to stay in the green.

Tax incentives for exporters can reduce their federal income tax spending, preventing the above cost-cutting measures from transpiring. IC-DISC corporations can deduct up to 50 percent of export income.

Increasing a Corporation’s Income

A corporation will have more income after delaying dividends on commissions and reducing federal income tax spending. This wealth can be used to reduce costs, expand (such as hiring more staff or opening more offices and warehouses), and research and develop new products and services.

Expanding Business Internationally

The additional income and ability to continue expanding its roster of goods and services will allow DISC-qualifying corporations to expand business internationally, increasing export revenue.

Exporting goods from the United States to other parts of the world gives businesses a competitive advantage, reduces risk (other economies might fluctuate less than their home economy), and increases access to tax incentives.

Is your corporation eager to explore tax incentives and ways to lower federal income tax? Reach out to Export Tax Management Inc. today and explore our services.

Requirements to Enjoy the IC-DISC Tax Incentives for Exporters

CPA explaining the International Sales Corporation (IC-DISC) tax incentives requirements to clients for optimizing export tax savings.

Corporations applying for tax-exempt status must understand the eligibility requirements for export tax incentives.

Here are the eligibility criteria an IC-DISC must meet:

  • Up to 95 percent of its gross receipts must be qualified gross receipts.
  • It must pass an export assets and gross receipts test.
  • It must have only one stock class valued at $2,500 or higher.
  • It must have separate records from other business entities.
  • When adjusted, its qualified export assets must be worth 95 percent (or more) of its asset sums.

Qualifying corporations must document all income and spending, including dividends, deductions, special deductions, inclusions, and gross income, even if the corporation doesn’t pay taxes thanks to its tax-exempt status.

The corporation must also file taxes by the required deadline. Avoid common mistakes, such as failing to meet IC-DISC status yet filing as one anyway, skipping or leaving off important parts of Tax Form 1120, and failing to check your math before filing.

FAQs About Tax Incentives for Exporters

I. What is the incentive to export?

Exporting allows businesses to reduce their tax liability through specialized tax incentives. Programs like the IC-DISC encourage U.S. businesses to sell products and services abroad by offering substantial federal income tax savings, thus enhancing profitability and global competitiveness.

II. What is the US export tax incentive?

The U.S. export tax incentive primarily refers to the IC-DISC (Interest Charge Domestic International Sales Corporation). This program allows qualified exporters to lower their taxable income by deferring taxes and converting ordinary income into capital gains, which are taxed at a lower rate, offering significant tax savings.

III. Who qualifies for IC-DISC tax incentives?

To qualify for IC-DISC tax incentives, businesses must be U.S. entities that export products, including manufactured goods, agricultural products, software, or architectural and engineering services related to export projects. Both corporations and pass-through entities, such as partnerships and S-corporations, are eligible.

IV. What is Foreign-Derived Intangible Income (FDII), and how does it benefit exporters?

FDII is income from exporting intangible assets, such as patents, trademarks, or intellectual property. Exporters benefit from FDII through a reduced tax rate, effectively encouraging innovation and U.S.-based companies to sell their intangible assets in foreign markets while lowering their overall tax burden.

V. Can service companies qualify for export tax incentives?

Yes, certain service companies can qualify for export tax incentives, particularly if their services are related to foreign projects. Engineering, architectural, and software development firms that deliver services abroad can benefit from IC-DISC tax advantages, provided they meet the necessary qualifications.

Do you have more questions?

If you’re interested in learning more about tax incentives for exporters, Export Tax Management is ready to assist. For further information, explore our IC-DISC FAQs or contact us to schedule a consultation and discover how IC-DISC can boost your export tax savings strategy.

Book a Consultation Now to Maximize Your Tax Incentives

Tax incentives for exporters, like FDII and IC-DISC, offer powerful opportunities for businesses to reduce their tax burden and boost profitability. These incentives reward your efforts and position your company for global expansion. 

Take the next step toward accelerating your growth by contacting Export Tax Management today!