Are you a small- or medium-sized company that exports its USA-made products to foreign countries? If so, are you taking advantage of a tax incentive known as an "interest charge-domestic international sales company" or IC-DISC?
The use of an IC-DISC allows you to significantly increase your company’s after-tax income. For example, profits are taxed at the dividend rate, as opposed to ordinary income tax rates that currently top out at 35 percent.
In order to qualify, a company must:
- Be incorporated in the United States
- Maintain a minimum of $2,500 of authorized and issued shares and have single class of stock
- Have gross receipts and assets related to export property of 95 percent
- Maintain its own bank account and separate accounting records
The goods must:
- Have U. S. content of at least 50 percent
- Have been manufactured, produced, grown, or extracted within the U.S.
- Be for ultimate use outside of the U.S.
Three types of companies benefit the most from an IC-DISC. The first is a company that directly exports what it manufactures. The definition of "manufactured good" is broad, and it includes software, films and many agricultural products. Goods that are exported to Canada and Mexico, not just countries overseas, fall within the guidelines.
The second type of company that can benefit is one that provides architectural or engineering services for projects outside the U.S, such as bridges or buildings. The services may be performed in the U.S., as long as the project itself is in another country.
The third type of company that can benefit is one that manufactures a good that is included in a product that is exported. Tax incentives are also available for companies that make a component part of a good that is exported. For example, a company that makes tires for a truck that is exported to South Africa can benefit from the tax incentive.
An IC-DISC is relatively easy to set up and operate, and it has the potential to reduce the tax rate on net export income by as much as 20 percent. A domestic C-corporation must request and receive IRS approval to be treated as an IC-DISC.
The IRS has issued an audit guide for IC-DISCs that will help you maintain the proper documentation that you'll need to prove your eligibility for the tax incentive. The guide focuses on four main areas:
- Ensure the IC-DISC is valid. Set it up properly and maintain it well.
- Ensure the export property is qualified – manufactured in the U.S. and exported.
- Ensure DISC commissions are properly calculated.
- Ensure the 1120 IC-DISC return is error-free.
A blog can't possibly cover all the details of a program like this one, but the IC-DISC could potentially save your company thousands of tax dollars. To see if you qualify for the tax incentive or to determine if this is right for your company, contact your tax advisor. Feel free to reach out to the HORNE team for more information.
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