Companies in various industries who sell or lease their products internationally are taking advantage of a powerful incentive to lower their tax liabilities and increase cash flow. The Interest-Charge Domestic International Sales Corporation, or IC-DISC, allows for qualifying companies to defer U.S. income tax on a portion of its export profits by allocating those profits to the IC-DISC. Companies may further realize a permanent tax savings by taking advantage of the 15% tax rate on dividends recently extended by the recent tax compromise signed into law by President Obama.
In recent years, two changes in tax policy have made the IC-DISC one of the most successful tax strategies for exporters – (1) the phase-out of the Extraterritorial Income Exclusion, and (2) the lower rate of tax on dividends.
The IC-DISC strategy primarily involves two entities – the Exporting Company, an existing US-based company exporting products to foreign markets, and the IC-DISC, which the Exporting Company forms in order to facilitate tax savings. The Exporting Company may exist in any number of industries:
- Software Development
- Defense Contracting
- Architecture & Engineering
- Biotech / Life Sciences
- Wholesale / Distribution.
The Exporting Company realizes tax savings by paying a commission based upon foreign sales to the IC-DISC. Since the IC-DISC is a tax-exempt entity, the IC-DISC does not incur a tax liability for the commission income.
The IC-Disc provides several benefits to Exporting Companies. The main benefits consist of:
- Converting Ordinary Income to Dividends – The main benefit of the IC-DISC for most Exporting Companies is the preferred tax treatment of foreign trade income. Through the IC-DISC, an Exporting Company can convert 50% of its foreign trade income from ordinary income, taxed at up to 35%, to dividends, taxed at a 15%. Taxpayers can realize this permanent, real-time benefit allows exporters to significantly reduce their tax liabilities.
- Interest-Charge Deferral – Alternatively, an Export Company may utilize the IC-DISC to defer up to $10,000,000 of qualified export revenue. The Export Company must pay a nominal interest charge for the deferred revenue attributable to the DISC.
The TRCG Advantage
TRCG is a market leader in assisting small and middle market companies take advantage of the IC-DISC. Our team of professionals possesses extensive experience with helping clients optimize IC-DISC formation, maximize the tax benefit through an exhaustive transaction-by-transaction analysis of export sales, and maintain the IC-DISC benefit going forward. TRCG works with our client’s CPAs to integrate the IC-DISC into the client’s overall tax strategy.
TRCG offers a no-cost, no-obligation assessment of the IC-DISC benefit for potential clients. Contact us for additional information.