New tax opportunity available for exporters

Do you know what IC DISC stands for? For exporters or professionals providing services for foreign-based projects, it stands for tax savings. Many exporters believed their tax incentives ended with the phase-out of the Extraterritorial Income Exclusion (EIE), but there is a little-acknowledged benefit called the Interest Charge Domestic International Sales Corporation (IC DISC), of which many taxpayers are unaware. Using this strategy can lower your federal income taxes on export profits to just 15 percent. An IC DISC provides incentives on the first $10 million in export sales and has existed since 1984, but it was overshadowed by other incentives. Here’s how it works: A qualified exporter establishes a separate IC DISC entity and pays a commission, based on IRS guidelines, to the IC DISC. The commission is deductible for the exporting company, providing a federal tax benefit of up to 35 percent. Individual owners of the IC DISC owe federal taxes when dividends are distributed, taxable at 15 percent. This effectively provides an arbitrage of 20 percent, the result of reducing the tax rate from 35 percent to 15 percent. The IC DISC must distribute all of its commissions or the tax on the earnings are subject to interest charges—hence the name “Interest Charged Disc.” This incentive is available to qualifying distributors, manufacturers, or sometimes both, as well as professionals, such as architects and engineers, for work on projects located outside the United States. A tax professional can help you determine if your export products qualify, evaluate the value of this incentive and provide the proper structure for the IC DISC.