An IC-DISC (Interest Charge Domestic International Sales Corporation) is a U.S. Corporation that elects special tax treatment. Congress created it to provide tax incentives to U.S. companies that export goods and services. When set up and operated correctly, the corporation itself generally does not pay federal income tax on its commission income. For many qualifying exporters, this translates into a permanent, repeatable federal tax reduction, not a deferral, year after year.
How IC-DISCs Work
IC-DISCs are set up to be used alongside existing operating companies. The operating company can be a C corporation, S corporation, partnership/LLC, or sole proprietorship. The operating company earns export income and pays a deductible commission to the IC-DISC on qualifying export sales. Under the IC-DISC pricing rules, the commission is generally the greater of 4% of qualified export gross receipts or 50% of combined taxable income from qualified exports. The IC-DISC then distributes its earnings to its shareholders as a dividend, which often allows income that would otherwise be taxed at ordinary individual rates (as high as 37%) to be taxed at qualified dividend rates (up to 20% plus 3.8% NIIT when applicable), depending on the owners’ situation. In practical terms, this rate spread of potentially 17 percentage points or more can generate significant annual tax savings for qualifying business owners. For example, a manufacturer with $5 million in qualifying export income could potentially save $50,000 or more per year through this structure, depending on their specific facts and circumstances.
Who Should Consider An IC-DISC?
If you meet most of the characteristics below, creating an IC-DISC could deliver meaningful, recurring tax savings for your business:
Sell products that are manufactured or produced in the United States for use outside the United States.
Provide qualifying services related to projects located outside the United States.
Have recurring export sales.
Have products with sufficient U.S. content to qualify as export property under the IC-DISC rules.
Are profitable on export sales.
Have an ownership structure where the owners can benefit from the rate spread between ordinary income and qualified dividends.
Are willing to invest in annual compliance, calculations, and documentation to support IC-DISC qualification and pricing.
Conclusion
IC-DISCs are not right for every business, but for the right one they can be a powerful and permanent tax reduction strategy, one that rewards you every year you continue to export. Because the rules can be complex, if your business has meaningful export activity and is looking to keep more of what you earn from those sales, contact an HBK Manufacturing Solutions advisor to assess whether an IC-DISC is appropriate for your situation.
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