Reducing Tax Liability with an IC-DISC
You’re 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?
You might be able to save up to 20 percent on federal taxes through the use of an Interest Charge-Domestic International Sales Corporation (IC-DISC).
We’ve helped manufacturers, distributors, and other types of companies form IC-DISCs. It’s a complex strategy, and it won’t work for every organization. But we can help you figure out whether or not you qualify and if it will provide you with the best tax savings.
What’s an IC-DISC?
An IC-DISC is a company established solely to receive commissions on export sales.
Essentially, a portion of the profits from export sales is paid as a commission to the IC-DISC. That commission isn’t taxed 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.
If you’re an S-Corporation, for example, this is how it could play out: Payment of the commission gives rise to a deduction, which reduces income subject to tax at a rate of 37 percent while the dividend income, upon repatriation, will be taxed at a rate around 20 percent. The result is a net federal income tax savings of about 17 percent.
In short: corporations may be able to avoid double taxation (at the corporate and shareholder level) on a portion of the income from export sales by setting up an IC-DISC.
Other potential IC-DISC benefits include:
- Additional cash to fund dividends, ongoing operations, and/or expansions.
- A variety of ownership alternatives – e.g., trusts may be IC-DISC shareholders.
- Shareholders may efficiently liquidate some of the value of their stock in the corporate entity.
- Convert some of the shareholders’ wealth from the value in the corporate entity stock to cash.
- State planning flexibility by increasing shareholders’ overall liquidity.
If you export internationally, an IC-DISC may provide additional tax savings, but it’s not for everyone. Learn more about the requirements to form an IC-DISC and whether it’s the right move for your organization – and then talk with one of our top international tax pros.
