Is Your Business Eligible for Export Tax Savings Through an IC-DISC?

by: Smith and Howard

December 1, 2015

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If you own a profitable business that is exporting items that are at least 50 percent manufactured, produced, grown or extracted in the U.S., you could be eligible for significant tax savings. All your business has to do is create a separate entity — the IC-DISC

Multiple Tax Advantages

Since the passage of the Jobs Act of 2004, any U.S. company that exports goods it manufactures in the U.S. may create an entity called an Interest Charge Domestic International Sales Corporation (IC-DISC). This separate legal entity, which acts as a “selling agent” for your operating business, has multiple tax-savings benefits:

  • Sales commissions paid to the IC-DISC are tax deductible to the operating business
  • The IC-DISC is a tax-free entity
  • Dividends paid to the shareholders are taxed at favorable dividend rates—20%
  • Profits may be accumulated for estate planning
  • IC-DISCs can work with C-corps, S-corps, LLCs or partnerships

What Qualifies?

Most people associate the IC-DISC only with tangible goods – say widgets – that are exported from the U.S. to a foreign country. Not so! While something on its surface might look more like a service than a widget, it doesn’t necessarily mean it’s excluded from IC-DISC tax savings. Exports can include receipts from sales, leases or rental of export property. They can also include engineering and architectural services for construction projects located outside of the country. For example, if an engineer designs plans for a building that will be constructed somewhere in Europe, those plans fit the export definition just as much as a tangible good.

One last note—you do not have to directly export your product in order for the sale to qualify—the product just has to end up offshore.  Any product that was produced 50% or more in the U.S. that ends up in a foreign country qualifies, even if you do not directly export it.  For example, if a U.S. manufacturer makes a widget and sells it to a U.S. distributor, then the U.S. distributor sells it to an end consumer in Canada, the sale would qualify as a foreign sale for IC-DISC purposes for both the manufacturer and distributor.

Do You Qualify?

While the IC-DISC entity classification has been around for a while, many U.S. exporters have failed to take advantage of the opportunity, or aren’t even aware that they qualify. Here are questions that will help you determine your eligibility:

  • Do you export or sell to a U.S. customer that exports products manufactured within the U.S.?
  • Does the export have less than 50 percent of its value made of imported components?
  • How much are your export sales? Are they profitable and if so, what is the approximate profitability of those sales?

In addition to these questions, there are a number of complex rules to determine how to structure your IC-DISC so that you are maximizing the income sheltered in the IC-DISC.

The manufacturing experts at Smith and Howard are available to help you assess your eligibility for an IC-DISC and to help you structure the most tax-advantageous entity. Contact Debbie Torrance at 404-874-6244 or simply fill out our contact form and we will be glad to help.

For any questions about your manufacturing business, visit our manufacturing page. 

How can we help?

If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.