Does your business export goods produced or grown in the United States or have foreign construction projects? If so, there are special tax incentives of which you should be aware. These benefits can be yours, with the help of the Interest Charge Domestic International Sales Corporation or IC-DISC.
There are a lot of details entangled in the IC-DISC. In short, exporters of goods like films or software industry are presented with the opportunity to reduce your taxable income without changing the structure of your business.
One thing to know, this tax benefit is available to all exporters. This includes corporations who sell their goods to businesses within the U.S and those companies export the product. So, even if your corporation is not directly exporting, you still have the opportunity to benefit from the IC-DISC.
In essence, an IC-DISC is a corporation formed as a separate corporation. It accepts commission on foreign sales although it may not have a direct role in those sales. IC-DISC are exempt from federal taxation so they do not have to pay on the commissions made. On the even brighter side, there is a tax deduction on the commissions paid to the IC-DISC.
Commission income is not recognized until payment is remitted on the dividend of retained earnings. IC-DISC are structured in a way to where the ownership of the Disc is paid through a “qualified dividend.” Thus your corporation receives a deduction from the higher-taxed rate income. Along with the lower capital gain rates, corporations have the opportunity to receive up to 20% of the commission through IC-DISC.
Yes, it is true, it may sound too good and a little “gimmicky”, but it is completely true. You may be wondering why you have never heard of IC-DISC before? Mainly because the only people who are privy to this information are CPAs or companies like Export Tax Management.
During the early years of exporting, many large companies kept their money in offshore accounts. They set up foreign subsidiaries to shift profit on foreign sales out of America. These large companies were then able to not show recognition of profits until said funds made their way back into the United States. In some cases this never happened.
When the Kennedy administration came along, they were able to remedy some of the loopholes. However, some of the larger corporations were still able to hide their money from the United States government.
1971 saw the creation of DISC. Congress was hungry to allow smaller companies to benefit from some of the tax benefits the larger corporations had been experiencing for years. Although this seemed like a fantastic idea for the United States, several other countries thought it was unfair. After around 13 years of legal proceedings, the DISC was fine-tuned, and thus the IC-DISC was born. 1984 also saw the introduction of the foreign sales corporation (FSC). FSC did not stick around for too long because they were deemed an illegal export subsidy and was repealed. Soon after, the extra-territorial income exclusion (EIE) was created, but never went through. Therefore, the only remaining motive to export companies is the IC-DISC.
Creating/Maintaining IC-DISC
There are several variables used when establishing and maintaining an IC-DISC. For example, your business cannot start taking in commission from the IC-DISC until the corporation which will become the separate IC-DISC is formed. When the IC-DISC corporation is formed, there must be an election within 90 days. However, your benefits are still able to accrue in the time between your formation and filing of the election.
When incorporating your IC-DISC make sure you are aware of the state’s corporate laws. This can sometimes be a little difficult to find, but Export Tax Management is here to make sure you follow South Carolina’s corporate laws for exporting. Our talented team is also here to assist you with making sure you have set up completely separate books. If they are not set up as separate, then the board should make sure they can be separated quickly.
In order to maintain your IC-DISC status, your corporation must have a specific total of “export assets” at the end of its year. The corporation needs to sustain a capital of $2,500, maintained at all times. Form 1120 will need to be filed every year, and Export Tax Management is here to make sure all information is turned in on time.
What Industries Benefit From IC-DISC?
Export Tax Management works many industries such as:
- Architecture
- Agriculture
- Recycling
- Software
- Metal Fabrications
- Manufacturing
- Film
- Distribution
- Seafood Processing
With the help of IC-DISC our clients across all of these different fields have been able to take advantage of the major tax incentive. This helps corporations to become more competitive and possibly increase the export side of their business.
Find Your Potential with Export Tax Management
Here at Export Tax Management, we understand every business is different and, therefore, every IC-DISC is different. We work diligently to make sure to oversee the formation of the separate corporation, assist with the preparation of the IC-DISC election, figure out what the commission will be, and assist with maintaining your IC-DISC annually. Contact us to find out how an IC-DISC can best work for your business.
