March 29, 2018
By Kevin Harris
A valuable federal tax incentive for manufacturers was on the brink of extinction when Congress debated the Tax Cuts and Jobs Act (TCJA) last December. Fortunately, the IC-DISC export tax incentive survived in the final tax reform bill, keeping intact an essential tax-saving vehicle for manufacturers who export goods and services to foreign countries.
The IC-DISC, or interest charge domestic international sales corporation, provides an incentive to companies that manufacture, produce, grow or extract their products and export them overseas. Congress enacted this tax benefit in 1971 to strengthen U.S. export sales.
The IC-DISC must be set up as a separate corporate entity under Sec. 991. While your manufacturing company pays a commission to this new entity, IC-DISCs are exempt from federal tax, so they do not pay taxes on the commission received. Dividends are then paid by the IC-DISC to shareholders at a reduced capital gains tax rate.
Who Can Benefit?
- Manufacturers and distributors who directly export qualified products
- Manufacturers and distributors who sell products for use overseas
- Corporations and pass-through entities that export qualified products
- Architectural and engineering firms that work on projects that will be constructed abroad
- The manufacturing business that is exporting items must be profitable
- The export must have less than 50 percent of its value made of imported components
- The product must be manufactured, produced, grown or extracted in the U.S.
Through an IC-DISC, you have the ability to improve your cash flow and reduce your tax liability.
- No need to directly sell your products abroad—the IC-DISC is also available to manufacturers who sell products to distributors or wholesalers who then resell outside the U.S.
- Sales commissions paid to the IC-DISC are tax-deductible for the operating business
- Income can be shifted to lower tax bracket employees
- IC-DISCs can work with a number of business entity structures: C corps, S corps, LLCs or partnerships
While the TCJA changed the top corporate tax rate from 35 percent to one rate of 21 percent, the 20 percent capital gains and qualified dividend rate remains unchanged. While tax reform reduced the rate spread, IC-DISC still represents an attractive savings vehicle, especially for flow-through entities.
Tax reform included other provisions affecting pass-through entities, so it will be important to calculate the advantages of the IC-DISC as part of your overall tax strategy. Now is an excellent time to consider your eligibility. If you do not have an IC-DISC, we can work with you to determine what your tax benefits would be, and then help you implement the IC-DISC and ensure you comply with all IRS requirements.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.