Is your business exporting goods or services overseas? If so, have you heard of IC-DISC?
An IC-DISC, or Interest Charge – Domestic International Sales Corporation, is an export tax incentive available to companies who export their goods and services overseas.
The IC-DISC allows U.S. companies to set up separate domestic entities, which act as commission agents for the company’s export sales. Three good reasons for setting up an IC-DISC are:
- The commission is fully deductible
- The IC-DISC pays no federal income tax
- The IC-DISC acts as a Subchapter C Corporation in that it distributes its income to its owners as a qualified dividend. The result is a permanent reduction in tax of up to twenty cents on every commission dollar (taking the difference between the top ordinary income rate (39.6%) and the top qualified dividend rate (20%)).
While the tax savings are true, thousands of businesses fail to take advantage of the incentive offered by setting up an IC-DISC. What businesses can benefit from the IC-DISC? I find it easiest to think of three types of businesses that potentially qualify for the IC-DISC tax benefit:
- A company that directly exports goods it manufactures. Example: I manufacture a pet product in Florida and ship to Australia. Note: What counts as a manufactured good is also broader than many people realize – it can include software, films and many agricultural products.
- A company provides architectural or engineering services that are conducted in the U.S. for a building built outside of the U.S. Example: An architectural firm based in Florida designs a building that is built in Germany.
- A company manufactures a good that is included in a product that is exported. This is probably the largest missed opportunity for businesses when it comes to the IC-DISC. IC-DISC tax incentives are also available in a situation where a company makes a component part that is included in a good that is exported. Example: Company Y makes hoses that are included on an engine that is shipped to Australia.
The White House and Congress agree that a key to our nation’s economic recovery is strengthening our manufacturing sector and encouraging exports. The IC-DISC is tailor-made to encourage exactly such activity – providing a tremendous tax incentive for small and medium business owners who export either goods or services. For those interested, please contact myself or your LBA tax professional for further details.
by Cody Vincent, CPA