One of the best kept secrets in the U.S. exporter world is the IC-DISC – Interest- Charge Domestic International Sales Corporation. This is a tax benefit offered by the IRS to U.S. small and medium size manufacturers. It provides those companies that establish an IC-DISC a chance to significantly reduce their taxes on exports of products outside the USA.
Yes, as crazy as it might seem the IRS is actually helping to reduce taxes paid by US corporations. How does it work?
This rule allows companies that establish an IC-DISC to pay taxes on its exports under the current U.S. capital gains rate (20%) versus the ordinary income tax rate (top rate currently 39.6% for a pass-through, and 35% for a C-Corp). You need to set up a separate company, or possibly more than one depending upon your current company structure and if your company has several entities. The exporting company pays a “commission” to the IC-DISC which are tax deductible to the exporter and deemed as dividend payment taxed at the much lower 20% rate versus the typical corporate rate 35%. To sum it up, an exporting company gets a 35% tax deduction on commission payments made to the IC-DISC but only pays 20% on the income it can repatriate from the IC-DISC. The end result is that the exporting company gets a permanent tax savings and a 10% higher net value of its exports!
Who can do it?
The answer is just about any manufacturing, architectural, and engineer firm that either directly exports its products, provides architectural or engineering services for projects outside the US, or companies that supply components or parts that are installed on equipment that is exported by their customers.
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R. Don Keysser Managing Principal