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SMART TAX USA - Interest Charge Domestic International Sales Corporation (IC-DISC)

Companies that export products manufactured in the United States to other countries can save money on their income taxes by forming an interest charge domestic international sales corporation (IC-DISC). The Deficit Reduction Act of 1984 allows an exporting company to appoint an IC-DISC as its agent for sale of goods outside the United States in a written sales agreement and pay sales commissions to the IC-DISC. The commissions are then treated as income but instead of taxing income from the exporter at a 35% corporate tax rate, income from the IC-DISC is considered to be shareholder dividend income with a tax rate of 15%. Commissions can be calculated as either 4% of the exporter’s qualified export receipts or as 50% of the exporter’s taxable income.

According to the Internal Revenue Service, an IC-DISC must be organized under the laws of a state or the District of Columbia, at least 95% of the IC-DISC’s total receipts must be qualified export receipts, and at least 95% of the adjusted basis of the IC-DISC’s total assets must be qualified assets. A corporation elects IC-DISC status by filing Form 4876-A, Election To Be Treated as an Interest Charge DISC, with the Internal Revenue Service. The IC-DISC itself is not taxed but the corporation’s shareholders are taxed when the income is distributed.

In addition to having the capability of effectively converting a portion of taxable corporate income to less taxable shareholder dividend income, an IC-DISC can defer as much as $10,000,000 in commission income annually. If commission income is deferred, the corporation’s shareholders pay only the tax levied on the interest charge for tax deferral and this is why such corporations are called interest charge domestic international sales corporations. Commission income that exceeds the allowed deferral amount is taxed as shareholder dividend income. In 2009 the interest charge for tax deferral was less than 1% per year.

There are several other ways in which an IC-DISC can benefit its primary owners and other shareholders. Employees of exporting companies can be rewarded by being made shareholders of an IC-DISC in order to provide additional work incentives. Family members of the owners can be made shareholders to facilitate business succession or estate planning, and they can benefit from the cash flow attributable to export sales. An IC-DISC is also allowed to enhance its own income for the benefit of shareholders by actively promoting, advertising and marketing the exporting company’s products.

Types of businesses that have taken advantage of the opportunity to create a related IC-DISC include:

• manufacturers

• food processors

• distributers

• software developers

• engineering and architectural firms that work on buildings or structures located in foreign countries

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