Reducing Tax Liability with an IC-DISC
You are exporting your products or services to a foreign country. As a result, you face a tremendous number of tax issues and potential new tax liabilities. Wouldn’t it be nice if you could reduce the taxes you owe? Some businesses have the ability to save up to 20 percent on federal taxes through the use of an Interest Charge-Domestic International Sales Corporation (IC-DISC).
An IC-DISC is a company established solely to receive commissions on export sales. A portion of the profits from export sales that are paid as a commission to the IC-DISC will not be subject to tax as ordinary income. This, in effect, allows a U.S. corporation to pay tax deductible distributions. Individual shareholders report these distributions at a more favorable tax rate as qualified dividends. Other intricacies are involved and each company’s specific fact-pattern must be analyzed before an IC-DISC can be recommended.
If you are an S-Corporation, this would play out as follows: Payment of the commission gives rise to a deduction which reduces income subject to tax at a rate of 39.6 percent while the dividend income, upon repatriation, will be taxed at a rate of only 20 percent. The result is a net federal income tax savings of 19.6 percent.
Corporations can avoid double taxation (at the corporate and shareholder level) on a portion of the income from export sales with a deductible commission at the corporate effective rate and taxable to the shareholder at the 20 percent dividend rate.
Other benefits to an IC-DISC include:
- Provides additional cash to fund dividends, on-going operations and/or expansions.
- Allows for variety of ownership alternatives; for example, trusts may be IC-DISC shareholders.
- Allows shareholders to efficiently liquidate some of the value of their stock in the corporate entity.
- Converts some of the shareholders’ wealth from value in the corporate entity stock to cash.
- Provides estate planning flexibility by increasing shareholders’ overall liquidity.
IC-DISC Experience: We have helped manufacturers, distributors and other types of companies form IC-DISCs. A complex tax strategy, we help businesses fully analyze whether or not they qualify for an IC-DISC and if it will provide the best tax savings.
If you export internationally, an IC-DISC may provide additional tax savings. Contact us to learn if you meet the requirements to form an IC-DISC and if it will produce the results you want.