If you are an exporter, why don’t you have an IC-DISC?

When looking at a map, Amarillo appears to be nearly in the exact middle of the United States, just as far from the west coast as it is from the east coast. Given that fact, one might think Amarillo would not be the home of many international exporters. Well…one would be wrong.

The Texas panhandle is home to a surprising number of manufacturers that, for whatever reason, find themselves shipping products all over the world. Demand for a product across the globe is, of course, good for business. However, selling goods internationally can also be good for taxes.

If you are a manufacturer that exports products to other countries, or if you manufacture an item or part used in a product that is exported, you need to know what an IC-DISC is. An Interest Charge – Domestic International Sales Corporation (an “IC-DISC” or “DISC”) is a creature of statute created by § 992 of the Internal Revenue Code and subject to a litany of treasury regulations. Boring, right? Well, here is the kicker: an IC-DISC does not pay income tax.

Let me repeat that last sentence: AN IC-DISC DOES NOT PAY INCOME TAX.

How does it work? Essentially, the IC-DISC allows manufacturers to turn a portion of ordinary income into capital gains. The Internal Revenue Code allows qualifying manufacturers to pay a commission to an IC-DISC in the approximate amount of 50% of the manufacturer’s taxable income from exports,[1] and the manufacturer is allowed to deduct the commission. The IC-DISC, which is a C corporation, does not pay any income tax on the commission. The IC-DISC can then pay a dividend to its owners (the same people that own the manufacturer), and the dividend is taxed at capital gains rates. For example, if a manufacturer has $1,000,000 in taxable income from exports, it can generally pay the IC-DISC a commission of $500,000. The commission can then be distributed at capital gains rates, and if the owners are in the top tax bracket, they will have direct and immediate savings of $98,000 (the difference between the top income tax rate, 39.6%, and the top capital gains tax rate, 20%).

What does the IC-DISC have to do in return for the commission? The answer is “nothing.” In fact, the IRS’s audit guide for IC-DISCs states that an IC-DISC

is not concerned about performance of any activities and, therefore, does not need employees or office space and does not have to actually participate in the soliciting, negotiating or concluding of any sales contract or perform any economic functions to earn a commission.[2]

Simply put, the use of an IC-DISC and the payment of the commission are expressly allowed by the Internal Revenue Code. Yes, there are some technical rules to follow. Yes, you need an attorney to help you set this up. Yes, your accountant will have more work to do. However, those costs will likely pale in comparison to the tax savings that will immediately result from the use of an IC-DISC.

If you manufacture exported products, or if you manufacture a good or part used in exported products, ask your attorney or CPA about an IC-DISC.

If you (or your attorney or CPA) have questions, call one of the attorneys in the tax section of Sprouse Shrader Smith PLLC. We will be happy to discuss your business and how it might benefit from the use of an IC-DISC.

[1] The commission can actually be the greatest of several items, all of which are covered by IRC § 994 and related statutes and regulations.
[2] https://www.irs.gov/businesses/international-businesses/ic-disc-audit-guide.

Article by Christopher D. Jones