Strategic Cost-Saving Opportunities Volume II | Page 4

Companies Involved in Exports
May Reap Benefits from an IC-DISC

America’s exporters are enjoying a hot streak. In 2014, US
businesses sold $1.6 trillion in goods abroad, contributing to
another annual export record – their fifth in a row, according
to the U.S. Department of Commerce.
However, too many of the nation’s businesses that export
products are failing to use a valuable tax incentive: the interest
charge-domestic international sales corporation, better known
as IC-DISC.
Though roughly 6,000 small to medium-sized businesses are
making use of an IC-DISC, only about a quarter of the potential
benefits are actually being captured by businesses, says Doug
Eckert, Partner and the International Tax practice leader at
Brown Smith Wallace.
US businesses are increasingly seeing the value of exporting.
The number of small and medium-sized companies that
export rose from 233,000 in 2005 to nearly 305,000 in 2012.
A growing number of business leaders also appear to be
taking an interest in using an IC-DISC. Putting this strategy into
place could lead to a significant improvement in your tax savings.
Here’s an example of the benefit an IC-DISC can offer. Let’s
say your company, a C corporation, makes $2 million in export
profits. The IC-DISC will report $1 million in export commission
income, and your company will reduce that $2 million of
export profits by the $1 million export commission. This leaves
just $1 million of income subject to tax.
Your company then pays tax of $350,000 (a 35 percent
rate), but the DISC does not pay tax. At the time the
IC-DISC // 04

DISC distributes its profits to individual shareholders, the
distribution is taxed at the qualified dividend rate of 20 percent.
The profits in the IC-DISC are ultimately subject to tax of
$200,000 in this example, compared to a corporate income
tax of $350,000, plus an additional $130,000 of tax when
those profits are distributed, had the IC-DISC not been
in place. That amounts to a savings of 14 cents for every
dollar of export profits by starting an IC-DISC and taking
advantage of this tax incentive. In the case of a partnership
or S corporation, the savings equal 8 cents for every dollar of
export profits.

What Exactly is an IC-DISC?
As its name implies, the IC-DISC is a corporation. Your
business sets up this entity, then you can put a portion of your
foreign income into it as a tax-deductible commission.
You don’t have to maintain office space for the IC-DISC, and
you don’t have to staff it with employees.
Conversely, the IC-DISC doesn’t have to play a role in
soliciting or negotiating deals or performing any other
activities for your company in order to receive the
commission. However, the IC-DISC must maintain a
separate set of records and books. The IC-DISC is exempt
from corporate income tax, alternative minimum tax and
accumulated earnings tax. When the IC-DISC distributes
the commission it earns to its shareholders, it’s in the form
of qualified dividends. Since the distributions are considered
qualified dividends rather than ordinary income, they’re taxed
at a lower rate.
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