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IC-DISC: Tax Savings for “Exporters”

Are you a manufacturer or distributor that sells domestically produced products in export markets such as Canada, Mexico or in Asia?  Are you an engineering or architectural firm that provides services for projects that will be constructed outside the United States?  If you answered yes to one of these two questions, you may want to consider forming an Interest-Charge Domestic International Sales Corporation (IC-DISC).

Under the IC-DISC structure, the exporter pays commissions to the IC-DISC for providing services as a commission agent.  The commissions are deductible by the exporter as ordinary business expense.  Subsequently, the IC-DISC entity distributes dividends to its owner(s) that are taxed to the owner(s) at the favorable qualified dividend rate.

On one hand, the exporter receives a deduction at the maximum ordinary income tax rate of 39.6% on the commission payment made to the IC-DISC, and on the other hand, the owners pay the maximum 20% qualified dividend tax rate on the dividend income distributed or deemed distributed by the IC-DISC.  This results in a permanent tax rate savings of about 20% for joint tax filers with AGI less than $250,000.

Taxpayers who would benefit from the IC-DISC structure are:

  • Domestic manufacturers who export,
  • Domestic manufacturers who sell domestically, but the goods are exported by the 3rd party buyer within 12 months,
  • International distributors of domestically produced goods,
  • Certain software developers,
  • Engineering and architectural firms performing work in the U.S. for projects that will be constructed abroad.

The IC-DISC structure provides great tax savings with low costs, but savings cannot be claimed on income earned before the formation of the IC-DISC.  Companies should take prompt action to ensure the entity is set-up as quickly as possible to maximize the savings.


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