IC-DISC is the last remaining export incentive available to U.S. exporters. It has been around in its current form since 1984, but did not become popular until the Jobs and Growth Tax Relief Reconciliation Act of 2003 lowered the capital gains tax rate making it much more attractive for exporters.
It is a domestic ‘paper’ entity that does not require employees, offices, or tangible assets. To be a qualified IC-DISC, a corporation must be organized under the laws of a State or the District of Columbia. The company elects to be treated as an IC-DISC and is governed under Internal Revenue Code §§991-997.
The different entity types that can use the IC-DISC include flow-through entities (S-Corps, partnerships, LLCs, etc.) and closely-held C-Corps. It’s important to note that you do not have to be the manufacturer of any products to take advantage of IC-DISC – you qualify if you export domestically produced products. Ideal industries include, but are not limited to, manufacturing, distributors, software, engineering/Architectural firms working on buildings/structures in foreign locations and more. IC-DISC is only viable and valuable to the shareholders if the following criteria apply: Minimum annual gross export revenues of $2,000,000 (direct or indirectly), Minimum annual net export revenues of $500,000 (direct or indirectly), and Significant tax liability on current or projected revenues.
The exporting company creates a tax-exempt IC-DISC. The IC-DISC is a “paper” entity that does not require office space, employees, or tangible assets. In this example, the IC-DISC is set-up under the ownership of the individual shareholders of the exporting company. The exporting company pays the IC-DISC a commission. The IC-DISC commission may be determined as the greater of 50% of export net income or 4% of export gross receipts. The commission may be increased even more in certain instances. The exporting company deducts the commission amount paid to the IC-DISC from its ordinary income taxed at 35%. The commission income for the IC-DISC is deferred from current taxation. When the IC-DISC pays dividends to its shareholders, the shareholders pay dividend income tax, currently at a rate of 15%. The net effect is a 20% tax savings on the IC-DISC commission.