IC-DISC (Interest Charge - Domestic International Sales Corporation
What is an IC-DISC?
The Internal Revenue Service provides an opportunity for U.S. exporters to reduce their income tax liability under an interest charge domestic international sales corporation ("IC-DISC").
Generally, an IC-DISC is a tax exempt, domestic "paper" corporation acting as a "commission agent", and setup to receive commision on export sales. It must keep separate books and records and file a separate tax return; but it does not need a separate office, employees or tangible assets such as property, plant and equipment.
Who benefits from it?
The use of an IC-DISC to obtain substantial tax savings may be available to manufacturers, producers, resellers and exporters of goods that are at least 50% produced in the United States with an ultimate destination for use, consumption, or disposition outside the United States. Gross receipts for engineering or architectural services for construction projects outside the United States may also qualify for substantial tax savings by using an IC-DISC.
How does it work?
Mostly acting as a commission agent, an IC-DISC may earn commission based on qualified export sales reported by the U.S. Exporter. Accumulated commission income earned by an IC-DIS may then be distributed to its shareholders in the form of a qualified dividend, which is taxed at capital gains rates as opposed to ordinary income tax rates. Because an IC-DISC is not taxed on its income, it may also be used as a defferal mechanism to defer taxable income. In return, the IRS imposes a small interest charge on shareholders for their share of the DISC-related deferred tax liability. In addition, the flexibility allowed for IC-DISC ownership structures provides the ability to shift income to different taxpayers, as the IC-DISC shareholders do not have to be the same as the U.S. exporter's shareholders.