Companies can establish an IC-DISC to earn a commission on export sales and claim a tax deduction.
Commonly referred to as IC-DISC corporation.
Do I Qualify for the IC-DISC?
By establishing a tax-exempt IC-DISC corporation, your business can pay commissions on your company’s export sales to the IC-DISC and receive a tax deduction on those commission payments.
2022 IC-DISC Details
The Interest Charge Domestic International Sales Corporation (IC-DISC) was created by Congress to promote export sales. Exports are goods that are produced in one country and sold to buyers in another.
Who Qualifies to Be an IC-DISC?
To be an IC-DISC, a corporation must meet the following requirements:
• The corporation is organized under the laws of a state or the District of Columbia.
• At least 95% of its gross receipts during the tax year are qualified export receipts.
• At the end of the tax year, the adjusted basis of its qualified export assets is at least 95% of the sum of the adjusted basis of all of its assets.
How Does the IC-DISC Strategy Work?
A US company can establish a tax-exempt IC-DISC C corporation to earn a “commission” on the export sales of the existing company (also referred to as the “operating company”). The IC-DISC’s commission is the greater of 50% of net income on sales of qualified export property, or 4% of gross receipts from sales of qualified export property.
If a related person (as defined under Treas. Reg. 1.993-1) sells export property to the IC-DISC, the intercompany pricing rules must be used to figure taxable income for the IC-DISC and the seller. These rules generally do not permit the related person to price at a loss. Under intercompany pricing, the IC-DISC's taxable income from the sale (regardless of the price actually charged) may not exceed the greatest of (1) 4% of qualified export receipts on the IC-DISC's sale of the property plus 10% of the IC-DISC's export promotion expenses attributable to the receipts, (2) 50% of the IC-DISC's and the seller's combined taxable income from qualified export receipts on the property, derived from the IC-DISC's sale of the property plus 10% of the IC-DISC's export promotion expenses attributable to the receipts, or (3) taxable income based on the sale price actually charged, provided that under Sec. 482 the price actually charged clearly reflects the taxable income of the IC-DISC and the related person.
What Are IC-DISC Tax Benefits?
The operating company receives a current tax deduction for the commission it pays, at ordinary rates. The IC-DISC is tax-exempt, so it does not pay tax on the commissions it receives. Income is tax-deferred until profits are distributed. Once they’re distributed, they are treated as qualified dividends (taxed at 15%, 20% or 23.8%, as the case may be.)
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• Reduce taxable income.
• Potentially reduce self-employment tax.
• Additional complexity, cost and annual administration required to set up a new entity.
Assumptions When Taking the IC-DISC
• Exports meet the requirements for qualified export receipts, qualified export assets, export property and a producer's loan.
• None noted.
Requirements to Claim the IC-DISC
• The IC-DISC must have only one class of stock, and its outstanding stock must have a par or stated value of at least $2,500 on each day of the tax year.
• The IC-DISC’s tax year must conform to the tax year of the principal shareholder who has the highest percentage of voting power. (Special rules apply if two or more shareholders have equal high percentages of voting power.)
• The election to be treated as an IC-DISC must be in effect for the tax year.
Business Entities That Can Claim the IC-DISC
• Schedule C
• S Corporation
• C Corporation
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.