Stephen C. Fox, CPA
U.S. International Tax
Stephen C. Fox, CPA, CMA
PO Box 880695
Port Saint Lucie,  FL  34988
+1(973) 610-5669
   International Tax      IC-DISC Export Tax Incentive

IC-DISC Export Tax Incentive:  Extended Indefinitely


U.S. taxpayers can get an export subsidy from the government for exporting U.S. made goods. This applies for manufacturers and resellers. The subsidy is available through a Domestic International Sales Corporation, the DISC export tax incentive.  This provision, first enacted in 1971, was little used from 1984 to 2004 because other subsidies were better (and mutually exclusive) for most taxpayers.  The reduction in the individual tax rate on qualified dividends rejuvenated this tax benefit. DISC is often referred to by the IRS form designation:  IC-DISC.

 

How DISC Works

Exporters of goods made in the U.S. may set up a DISC owned by either the flow-through entity (S corporation, partnership, or LLC) doing the exporting or by the shareholders of a C corporation. The exporter (related supplier) pays the IC-DISC a commission for doing nothing. IRS regulations contain formulas and rules for determining the amount of the commission. The IC-DISC pays no tax. It then pays a dividend each year equal to its commission. That dividend qualifies for the reduced tax rate on dividends (currently 15% or 20%, depending on regular tax bracket). The related supplier takes a deduction for the commission (potentially at 35% or 39.6%).

 

IC-DISC commission is the higher of 4% of export sales or 50% of net profits on exports. Special rules in the regulations can significantly improve results where there is variability in gross margins.

 
Additional Tax on New Investment Income
Beginning 2013, an additional 3.8% tax applies to net investment income if the taxpayer's adjusted gross income exceeds certain thresholds. DISC dividends are qualified dividends and investment income. Thus, a tax rate of up to 23.8% applies to the dividend.
 

What's the Risk?

IC-DISC has almost no risk. It is not cutting edge, not a tax shelter, not aggressive.  If a taxpayer follows the regulations in making calculations, and if the goods meet the maximum 50% foreign content requirement, then there is no adjustment for the IRS to make.

 

How Long Will It Last?

The Bush administration asked Congress to change the law to prevent IC-DISC dividends from qualifying for the 15% rate. Congress said no, it stays.  The Obama administration has not even proposed any change that would get rid of IC-DISC, and Congress does not seem to want to get rid of it. The dividend tax was increased effective 2013 to 20% for taxpayers in the top (39.6%) tax bracket, and made permanent.  IsDISC here forever?  Are you.  Who knows. Enjoy the present and hope for the future.
 

What Does It Cost?

Set up cost for a IC-DISC is $4,000.  That includes a new corporation and appropriate documentation.  Then the IC-DISC must file a tax return each year.  If the calculations are simple, the tax return costs about $2,000.  In many cases, it is worth making more complex calculations, which cost more but reduce taxes by much more than the increased fees.

 

Simple Example:

            Total Sales                               $50M

            Export Sales                                2M

            Total Taxable Income                   5M

            4% of Export Sales                                $80k

            50% of Export TI:

                        50% x  2/50 x $5M                  $100k

            DISC Commission                                $100k

            Tax savings:  (39.6%-23.8%)                            $15.8k
 
Technical Details:  IRC §§991-996.  Calculations:  Reg. §1.994-1 & -2
 
For a 1 page summary of DISC, click  here .
 
Steve Fox can help you start saving taxes with the IC-DISC export tax incentive.  Call today for help setting up a DISC or help with DISC calculations and tax returns.

 
It's your business:  get personal.  Call Steve Fox at  1(973) 610-5669  or  email steve @ sfoxcpa .com
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