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Interest Charge Domestic International Sales Corporation (IC-DISC)

IC-DISC

TAX SAVINGS FOR EXPORTERS

Reduce Current & Future Taxes

An overlooked tax break that could be your big break

What Is An IC-DISC?

An IC-DISC is a tax-exempt, domestic “paper” corporation set up to receive commissions on your company’s export sales. It must have its own bank account, keep separate accounting records and file U.S. tax returns. But it need not have an office, employees or tangible assets, nor is it required to perform any services.

An IC-DISC reduces your tax liability by converting a portion of your export income, which is taxable at ordinary income rates as high as 40.5%, into qualified dividends generally taxed at 23.8%.

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IC-DISC History

Started 1971: Revenue Act of 1971 establishes Domestic International

Sales Corporation (DISC)

Changed in 1984: Interest Charge-DISC in response to European

Economic Community

The Jobs and Growth Tax Relief Reconciliation Act of 2003:

Qualified dividend tax rate reduced to 15% creates tax break

American Taxpayer Relief Act of 2012: Qualified dividend rate

extended indefinitely at 15% - 23.8% depending on income bracket while

raising top line tax rate to 39.6%

Applies to all types of taxpayers (Sole proprietors, Partnerships,

LLCs, S corporations and C corporations)

IRC Code Sections: § 992, 993, 994, 995, 996

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IC-DISC Basics

An IC-DISC is a “paper corporation”, the related operating company continues with business as usual

Tax benefits commence once an IC-DISC is established

Tax benefits are calculated annually

Available to all exporters whether a manufacturer, producer, grower, software developer or distributor

Qualified export property must have at least 50% U.S. content

Must be a U.S. taxpayer to benefit from an IC-DISC. It does not matter what type of company the operating company is. It can be a:

Sole Proprietorship

Partnership

LLC

S Corporation

C corporation

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How do you qualify to save taxes through an IC-DISC?

1. Ultimate beneficiary or shareholder should be a U.S. Taxpayer.

2. Operating Company must be profitable.

3. Operating Company must export items of 50% or more U.S. content to locations outside of the U.S. whether directly or indirectly, or provide engineering or architecture services on construction projects outside of the U.S.

IC-DISC Basics

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IC-DISC Taxes and its Shareholders

An IC-DISC is not subject to corporate tax (IRC 991)

Money paid out of an IC-DISC is treated as a Qualified Dividend at a rate from 15% - 23.8%

If the exporting entity is a flow-through entity, tax savings are typically up to 17%

If the exporting entity is a C corporation, it can still benefit from the differential in rates and income is shielded from double taxation

Income can be deferred within the IC-DISC

IC-DISC Basics

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Qualified Export Sales

Qualified Export Sales

• Sale, exchange or other disposition of export property

• Lease or rental of export property used outside of U.S.

• Related and subsidiary services (engineering and architectural services; managerial services for furtherance of exports)

• Sales made to U.S. distributors

• 50% or more of the content must be U.S. derived

• Do not need to be the ultimate producer or ultimate exporter

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Proof of Export

• Copy of sales invoice

• Copy of export bill of lading

• Certificate of carrier showing delivery outside the U.S.

• Certificate of lading by customs officer of foreign country

• If no custom’s officer, written statement of recipient

• Shipper’s export declaration filed with Bureau of Customs

• Other proof: invoices, receipts, payment, etc.

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Qualified Export Sales

IC-DISC Commission

The tax savings are based upon a commission agreement between the operating company and the IC-DISC

The Operating Company pays the IC-DISC this commission or ‘Export Management Fee’ based on the following:

50% of the Qualified Export Sales pre-tax net income (50% method), or

4% of the Qualified Export Gross Receipts

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IC-DISC Benefit Example Using 50% Method

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Foreign sales 20,000,000

Cost of goods sold (16,000,000)

Gross Margin 4,000,000

Selling, general and administrative costs (3,000,000)

Export sales net income 1,000,000

IC-DISC commission (greater of):

50% of export net income 500,000

4% of export gross receipts 800,000

IC-DISC commission 800,000

Federal tax savings (39.6%) 316,800

IC-DISC dividend 800,000

Federal tax cost (23.8%) 190,400

IC-DISC net tax savings 126,400

IC-DISC Commission Method

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Neither the 4% gross receipts method nor the 50% method may be applied in a way that causes, in any taxable year, a loss to the related supplier.

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IC-DISC Commission Method

Qualified Export Sales

IC-DISC

Operating Company

Commission

Export Customers

IC-DISCShareholder(s)

Sales

Qualified Dividend

Operating Company Qualifies For IC-DISC

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IC-DISC

Operating Company

Commission

Export Customers

IC-DISCShareholder(s)

Sales

Qualified Dividend

U.S. Supplier

Supplier & Operating Company Qualify For IC-DISC Supplier

IC-DISC

Qualified Export Sales

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IC-DISC

Operating Company

Commission

Export Customers

IC-DISCShareholder(s)

Sales

Qualified Dividend

U.S. Supplier

Supplier, Operating Company & Distributor Qualify For IC-DISC

U.S. Distributor

Distributor IC-DISC

Qualified Export Sales

Supplier IC-DISC

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IC-DISC

Operating Company(> 50% Value Added)

Commission

Export Customers

IC-DISCShareholder(s)

Sales

Qualified Dividend

Foreign Supplier

Operating Company with Foreign Supplier DOES Qualify For IC-DISC

Qualified Export Sales

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IC-DISC Ownership

If the Operating Company is a Flow-Through Entity, potential owners of the IC-DISC are:

Individuals

Trusts

The Operating Company

Other Flow-Through Entities

If the Operating Company is a Non-Flow-Through Entity, potential owners of the IC-DISC are:

Individuals

Trusts

Flow Through Entities

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IC-DISC Incorporation

1. State of Incorporation

2. Incorporation Requirements

3. Incorporation Documents

4. Agreement(s) between Operating Company and IC-DISC

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Incorporation Requirements

1. Establish Corporation

2. Single Class of Stock

3. IC-DISC Election (Form 4876-A)

4. Capitalization of IC-DISC of at least $2,500

5. Timing of Incorporation

6. Separate books from Operating Company

IC-DISC Incorporation

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Other Documents Related To The IC-DISC

1. Incorporation Documents: Bylaws, Articles of Incorporation, Shareholder Agreements, etc.

2. Agreement(s) between Operating Company and IC-DISC: Sales Agent Agreement (Commission Agreement)

IC-DISC Incorporation

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Pass-through Entities (S-Corporations, LLCs and Trusts): Dividends pass through the corporation to the shareholders and are taxed at the Qualified Dividend tax rate of 15% - 23.8%.

IC-DISC

Pass-through Exporting Company (Related Supplier)

Payment To IC-DISC Reduces Taxable Income at 39.6%

Qualified Dividend Taxed At 15% -23.8%

Individual Shareholder(s)

IC-DISC Ownership

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C-Corporations: Avoid double taxation by having the IC-DISC owned by individual shareholders.

IC-DISCC-Corp Exporting Company (Related

Supplier)Payment To IC-DISC Reduces Corporate

Taxable Income at 34%

Qualified Dividend Taxed At 15% -

23.8%

Individual Shareholder(s)

IC-DISC Ownership

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Publicly Traded Operating Companies

Only real option is to have the IC-DISC owned by the Operating

Company and use it as a tax deferral vehicle.

Large / Changing Shareholder Bases at Operating

Company

Flow-Through Entity – optimal to have Operating Company own IC-DISC and use it as tax savings vehicle

C-Corp – Either use as deferral vehicle or have individual shareholders own the IC-DISC and change ownership accordingly

IC-DISC Ownership

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Estate Planning: IRA

IRA Ownership Of IC-DISC

• Accumulated IC-DISC income taxed at individual rates 15-39.6% when distributed

• Assets in IRA invested tax-free

• Roth IRA distributions not taxed to beneficiaries

• Cases pending on whether excise tax on excess contributions is applicable

IC-DISC Ownership

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IC-DISC Ongoing Items

Annual Maintenance and Items To Adhere By

1. 95% qualified gross receipts test

2. 95% qualified export asset test

3. $2,500 capital at all times

4. Timely payment of commissions

5. 1120 IC-DISC and applicable Schedules

6. Maintain IC-DISC books

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Tax Return & Filings

1. IC-DISC Election (Form 4876-A)

2. 1120 IC-DISC & Attached Schedules

3. Form 8404

4. Applicable State Filings

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Identify Opportunities

1. Where does the company sell its products? Where are projects located if architecture and engineering firms?

2. Does the company sell to third parties or distributors?

3. Are the products exported by the company made in the U.S. or is 50% or more of the content derived from the United States?

4. Was the company qualified for the Extraterritorial Income Exclusion in years past? If so, it likely qualifies for an IC-DISC.

5. In order to capture tax benefits with an IC-DISC, the IC-DISC must already be formed. So be proactive.

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Ways IC-DISC Consultants Can Help

IC-DISC Structural Analysis & Consulting

Incorporation & Agreements

IC-DISC Compliance

IC-DISC Calculations and Tax Benefit Maximizing Analysis

Ongoing Consulting and Advisory Services

Year-End Planning

Year-End Analysis and Tax Benefit Maximization

IC-DISC Tax Returns & Forms

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Please feel free to contact us with any further questions.

Thomas Clarke

tc@csrk.com

Kamran Khan

kk@csrk.com

Clarke, Snow & Riley, LLP

25 Newport Avenue Extension

Quincy, MA 02171

TEL (617) 773-9944

FAX (617) 773-9292

www.csrk.com

Contact

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