If you export a significant portion of goods overseas, you may be eligible for a significant tax incentive which Forbes has said “sounds too good to be true.” In this post, I’ve outlined a few IC-Disc basics so you can determine whether it’s a strategy that might benefit you. Its purpose is to incentivize small and medium US producers to increase exports. The result of this tax strategy has yielded some of the greatest tax savings of any IRS program.
It’s officially named the Interest-Charge Domestic International Sales Corporation (IC-DISC). Simply put, a portion of your income produced from exports is transferred and held in a separate IC-DISC entity, then transferred back to the owner. The IRS has agreed to treat this income as a dividend, which utilizes the lower capital gains tax rate rather than the ordinary income tax rate. This difference in the rates could save you up to 19.6% in total taxes on that portion of your income.
The spectrum of companies which qualify for an IC-DISC is surprisingly broad—there isn’t a restriction on the types of exporting companies. In the Central Valley we’ve primarily seen an increase in popularity with our farming clients—specifically with almond and other nut growers, as global economic conditions have resulted in increased exports of these products.
Also, manufacturing companies can qualify in a few different ways. Manufacturers and producers of exported goods are all eligible as long as the goods were originally produced in the US. This means that you qualify even if you could produce something that is integrated with another US company’s exported product. This is often the case with auto and equipment parts.
The IC-DISC isn’t new (it was created in 2004), but it’s become more popular over the last 5 years due to strong commodity prices overseas and clarification of IRS rules. It’s important to do an initial calculation to make sure you qualify for the benefit, since the initial set up process is more extensive than for a normal entity. If you’re considering an IC-DISC, find a CPA firm which either specializes or has past experience in them. Not every firm has the depth of knowledge you will need.
Is an IC-DISC right for you?
This is a complex tax incentive. From the entity set-up to the compliance records, there are many rules and timelines to follow in order to have a successful filing. However, under the right circumstances, the tax benefits can be great. There is also an additional incentive allowing you to defer tax on this income for up to five years, but only some companies may qualify.
I wrote another post detailing the IC-Disc steps and how to qualify for the additional incentive.
Reach out to our firm if you think this could benefit you and your company—we’d be happy to walk you through the process.
By David Olson, CPA
Manager at WHH