The Interest Charge – Domestic International Sales Corporation (IC-DISC) has been a valuable tool for small- to medium-sized companies that export a high volume of goods or services. Upon creating an IC-DISC, a company essentially funnels a percentage of its profits on export sales to individual shareholders at a lower tax rate: Instead of the company or its owners paying ordinary tax rates on foreign sales, the shareholders of the IC-DISC pay a dividend tax rate on that income.

But, with the Bush-era tax cuts set to expire at the end of 2012 and a new 3.8% surtax on unearned income set to be added in 2013, the dividend tax rate will rise for many individuals. And the IC-DISC may not provide the same tax savings that it has provided in previous years.

IC-DISC Tax Options

An IC-DISC can retain a certain percentage of earnings from the affiliated company, rather than distribute those earnings to the IC–DISC shareholders. There is a modest cost to retain earnings – essentially, the shareholders of the IC-DISC pay interest to the IRS on a deferred income tax liability – but it will be cheaper than if the company or its shareholders pay ordinary income tax rates on those earnings. Then, the IC-DISC can turn around and loan those earnings back to its affiliated company, resulting in a net savings for the group.

Another option is to include shareholders in the IC-DISC who will qualify for a lower tax rate – meaning individuals whose modified adjusted gross income is less than $200,000 or married couples whose AGI is less than $250,000. You could take advantage of the gift-tax exemption by tax-efficiently gifting shares of an existing IC-DISC to family members who will qualify for a lower tax rate.

As always, there are numerous other factors to consider, so consult your Barnes Dennig tax representative before embarking on either option discussed here.

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