An Interest Charge Domestic International Sales Corporation (“IC-DISC”) is an income tax savings incentive provided by the tax code. The IC-DISC election allows U.S. exporters to increase their global competitiveness by reducing U.S. tax liabilities.
It creates permanent tax savings by transferring income from the exporter to the IC-DISC through an export sales commission mechanism. You can think of the IC-DISC as an internal sales agent working on commission. The agent is deemed to have ‘sold’ the product, but the exporter is responsible to fulfill, invoice, and ship the order.
The IC-DISC is tax-exempt at the entity level; the operating company receives a deduction for the commission paid at ordinary tax rates. It distributes its profits as qualified dividends, and the owners pay tax on the dividends at more favorable capital gains tax rates. Depending on the owners’ personal income levels, federal capital gains tax rates range from 0 to as high as 23.8% (the rate of 20% plus an additional 3.8% of net investment income tax).
Should I Make an IC-DISC Election?
There are quite a few rules that an exporter must follow to maintain its IC-DISC status:
- The IC-DISC must be a U.S. corporation organized under the laws of a State or Washington, D.C. It must offer only one class of stock with par or stated value of at least $2,500, and maintain a separate set of books and records for the IC-DISC.
- At least 95% of gross receipts during the tax year must be qualified export receipts, and the adjusted basis of its qualified export assets must be at least 95% of the sum of the adjusted basis of all of its assets.
- The taxable year-end of the IC-DISC must be that of the majority shareholder. If two or more shareholders have the highest percentage of voting power, the IC-DISC may elect a tax year that aligns with any one of the majority shareholders.
If you don’t already have an export company, you might consider establishing one somewhere without state income tax to eliminate the need to file state income tax returns. However, the potential tax savings and return on investment don’t always outweigh the costs of creating and administering an IC-DISC. Generally, if you are not manufacturer or distributor of qualified export property with export sales revenue of at least $2.5 million, the election is not worth it.
How Do I Make an IC-DISC Election?
Make the IC-DISC election within 90 days of formation by filing IRS Form 4876-A, Election To Be Treated as an Interest Charge DISC. The election is in effect for the tax year. Once the election is made, the entity should file federal informational returns on IRS Form 1120-IC-DISC.