Can your business benefit from use of an IC-DISC?
If you have any of the following situations in your business, then you should consider the use of tax provisions available to an IC-DISC (Interest Charge-Domestic International Sales Corporation) which could be beneficial to your company and you as a shareholder in your company:
- A company directly exporting its manufactured goods - Example: Company X manufactures widgets in NJ and ships them to South America.
- A company providing architectural or engineering services for construction projects outside of the U.S. – Example: An engineering firm based in MA designs an HVAC system for a building that is located in Canada
- A company manufacturing a good that is included in a product that is exported – Example: Company Y makes the engines that are included in a vacuum that is shipped to China.
- A company leasing or renting export property to a lessee who uses it outside the United States - Example: Company Z owns hydraulic equipment; a company in Spain leases this equipment from Z.
What’s the tax advantage from using the IC-DISC?
In its simplest form, income is not taxed at the IC-DISC level but is passed from an IC-DISC to its shareholders. At the shareholder level, it is taxed at the qualified dividend rates instead of the ordinary income rates. Currently the qualified dividend tax rate ranges from 0% to 20%, depending on your ordinary income tax bracket. And Federal ordinary income rates range from 0% to 39.5%. Using the top tax rates for an example, this would amount to a tax savings of the difference between 20% versus 39.5%; a considerable amount.
How do I form an IC-DISC?
A separate corporation (the IC-DISC) must be created to maximize the tax benefits. Your exporter company pays commissions to the IC-DISC. The commissions are deductible to the exporter company, and the commissions are income to the IC-DISC, and passed through to shareholders, as qualified dividend income.
Determining how to set up the entity and how to report activity correctly is a complex task and far more detailed than can be described here. However, contact your Smolin advisor, and we would be happy to discuss the IC-DISC with you, determine if it is right for you and your company, and assist you in its implementation.
A note from Phil Drudy, Partner of the Firm, on the value of an IC-DISC:
Currently, Smolin has a client that generated an IC-DISC commission in excess of $900,000. This translated into a $180,000 tax savings, with a cost to administer the IC-DISC of less than $10,000, saving the client approximately $170,000. As long as they have foreign sales, this will be an annual savings. If you find that your particular case satisfies any of the criteria listed above in this piece, don’t hesitate to reach out so we can open discussions.