The utilization of an Interest Charge-Domestic International Sale Corporation (IC-DISC) is an often overlooked, yet potentially significant federal tax incentive offered to domestic exporters. Despite sounding complex, this tax benefit can be quite straight forward. Simply put, the tax laws provide an opportunity for a company which engages in qualified export transactions to use an IC-DISC to convert a portion of its earnings attributable to export receipts from ordinary income to qualified dividend income. A portion of the revenue or earnings generated through export sales and paid to the IC-DISC in the form of a commission can either be retained by the IC-DISC at a small interest charge or distributed to the shareholders of the IC-DISC. When earnings are distributed they are taxed to the individual shareholders at the qualified dividend rate (max 23.8%) as opposed to ordinary income rates (max 43.4%). Although IC-DISCs are organized as C Corporations there is no entity level tax on the income received from the export corporation. The income is only taxed upon distribution to shareholders via a dividend.
In general, three types of export transactions enable businesses to benefit from IC-DISC treatment. The first type of qualified transaction is on goods manufactured in the U.S. and directly exported. Secondly, goods manufactured in the U.S. that become part of a final product which is ultimately exported are qualified export property. Therefore, distributors which export property may also qualify for this incentive. Finally, businesses that provide engineering or architectural services domestically for a project to be completed outside the U.S. can qualify for this incentive.
Utilizing the benefits of the Interest-Charge Domestic International Sales Corporation can effectively soften the tax burden by shifting export income from high ordinary income tax rates to preferential qualified dividend rates.
If you feel as though you may qualify for this tax incentive, please contact your tax consultant at Vrakas CPAs + Advisors.