The Basics
- An IC-DISC can turn a portion of export income into lower-taxed qualified dividend income. By paying a commission to a separate IC-DISC entity, a qualifying exporter may convert income otherwise taxed at ordinary rates into income ultimately taxed to shareholders at preferential dividend rates, creating permanent federal tax savings.
- Many exporters may qualify. Manufacturers, distributors of U.S.-made products, and certain businesses providing engineering, architectural, or software-related export activity may be eligible if they meet the qualified export rules, including the U.S.-content and foreign-use requirements.
- The benefit depends on proper setup and ongoing compliance. A company must make a timely IC-DISC election, satisfy the 95% qualified export receipts and 95% qualified export assets tests, and calculate the commission under IRS rules — generally using the greater of 4% of qualified export receipts or 50% of export taxable income, subject to applicable limitations.
For U.S. companies expanding their footprint in the global marketplace, the quest for tax efficiency is a top priority. While many tax incentives have come and gone with recent legislative shifts, the Interest Charge Domestic International Sales Corporation (IC-DISC) remains one of the most effective tools available for U.S. exporters to reduce their federal tax liability.
If your business manufactured products in the U.S. and sold them abroad, distributed US-made products abroad, or provided engineering or architectural services for foreign projects, you may be sitting on a significant tax savings opportunity.
What is an IC-DISC?
An IC-DISC is a separate domestic corporation formed by a U.S. exporter. It doesn’t require office space, employees, or even tangible assets to function. Instead, it serves as a “tax-exempt” vehicle that allows a portion of export profits to be taxed at the lower capital gains rate rather than the higher ordinary income rates.
By paying a commission to the IC-DISC, the exporting company (the “parent”) receives a deduction at ordinary income tax rates. The IC-DISC then pays out those funds as dividends to its shareholders, which are generally taxed at the preferential qualified dividend rate, currently 20% (plus the 3.8% net investment income tax, if applicable).
Does Your Company Qualify?
To take advantage of an IC-DISC, a business must meet several qualified export criteria. Generally, the incentive is available to:
- Manufacturers: Companies that produce goods in the U.S. where at least 50% of the value is attributable to U.S. inputs.
- Distributors: Businesses that purchase U.S.-made products and sell them to foreign customers.
- Service Providers: Specifically, those providing engineering or architectural services for construction projects located outside the U.S.
- Software Developers: Companies licensing certain software for use outside the U.S.
The Core Benefits: More Than Just a Rate Reduction
The primary driver for an IC-DISC is the permanent tax savings created by the rate arbitrage between ordinary income and qualified dividends. However, the benefits extend further:
- Increased Cash Flow: The tax savings can be reinvested back into the business to fund expansion, purchase equipment, or increase R&D efforts.
- Liquidity for Shareholders: It provides a structured way to get cash out of the company and into the hands of owners at a lower tax cost.
- No Operational Disruption: Because the IC-DISC is a “shell” corporation for tax purposes, it does not require changes to your day-to-day manufacturing or sales operations.
- Estate Planning Opportunity: IC-DISC shares can sometimes be owned by retirement accounts or family trusts, providing a unique vehicle for wealth transfer.
How the IC-DISC Calculation Works
The commission paid to the IC-DISC is typically the greater of:
- 4% of qualified export receipts, or
- 50% of the net income derived from qualified export receipts.
Because these calculations can become complex, especially when considering marginal costing or “grouping” of transactions, we recommend working with a tax professional to ensure you’re utilizing the method that yields the highest possible deduction.
IC-DISC Planning Considerations
While the IC-DISC is a “permanent” incentive, it requires strict adherence to IRS compliance rules to maintain its status.
- The 95% Test: At least 95% of the IC-DISC’s assets must be qualified export assets, and 95% of its gross receipts must be qualified export receipts.
- Timely Commission Payments: Commissions must be paid to the IC-DISC within 60 days of the end of the tax year.
- Ultimate Foreign Use: The products sold to foreign parties need to be ultimately used outside of the U.S.
- Form 1120-IC-DISC: This specialized tax return must be filed annually, even though the entity itself pays no federal income tax.
Your Takeaway
In an era of fluctuating tax policy, the IC-DISC stands out as a stable, IRS-sanctioned method for U.S. exporters to remain competitive on the global stage. If you have not reviewed your export structure recently, you may be overlooking a meaningful opportunity to improve your bottom line.
Rehmann’s international tax team is ready to help you evaluate your eligibility and model the potential savings an IC-DISC could bring to your organization. To connect with one of our specialists, click here.
Frequently Asked Questions
Q: Can S Corporations and Partnerships use an IC-DISC?
A: Yes. While the IC-DISC is a C corporation, its shareholders can be individuals, S corporations, or partnerships. The flow-through nature of these entities allows the individual owners to benefit from the qualified dividend rates.
Q: Is there a minimum export volume required?
A: There is no legal minimum, but because there are costs associated with forming and maintaining the entity, a business typically needs at least $2 million to $3 million in annual export sales for the tax savings to outweigh the administrative costs.
Q: Does the product have to be shipped directly from the U.S.?
A: Generally, yes. The goods must be “exported”—meaning they are sent from the U.S. to a foreign destination for use, consumption, or disposition outside the U.S.