FEDERAL INCOME TAX SERVICES
Export Incentive (“IC-DISC”) Services
The “IC-DISC” is truly the last surviving export incentive for U.S. businesses. The acronym stands for the Interest Charge – Domestic International Sales Corporation. Unlike other export incentives that have been repealed due to economic sanctions by the World Trade Organization (WTO), the IC-DISC remains intact and is now more attractive than ever due to currently low dividend tax rates. The IC-DISC has been in existence since 1984 and has never been challenged by the WTO.
The IC-DISC provides U.S. exporters and their shareholders permanent tax savings (39.6% of net export income). The basic operation of an IC-DISC can be demonstrated as follows:
- A US exporter (or shareholder(s)) forms an IC-DISC corporation.
- The US exporter pays a deductible commission (39.6% - the high individual income tax rate).
- The IC-DISC pays no U.S. income tax on the commission income.
- The commission income is accumulated and untaxed in the IC-DISC.
- The commission income is taxed when the IC-DISC decides to pay a dividend to its shareholder(s)
(at the preferred qualified dividend tax rate of 20%).
- The permanent tax benefit is reduction of the tax rate of approximately 20%
The majority of privately held U.S. companies are missing a significant income tax incentive because it’s believed they simply don’t qualify. We find that less than 10% of eligible companies that are involved with direct or indirect exports are not taking advantage of the “IC-DISC” tax incentive program.
This tax incentive is provided for companies that are directly or indirectly involved in exports. This tax incentive was recently solidified by the 2013 “Fiscal Cliff” deal between Congress and the President. Here are some common fables that explain why companies are missing this opportunity:
|“Our company is a distributor and we do not manufacture any products. We don’t qualify.”||INCORRECT – Tax benefits are also available to the distributors of U.S. made goods that are eventually consumed or used outside the U.S.|
|“We are a software company and export incentives do not apply to us”||INCORRECT - Software that is downloaded from a server in the US by a Company outside the US or software licensed for reproduction outside the U.S. qualifies.|
|“We perform our engineering services overseas and often work on merely proposed projects. We don’t qualify.”||INCORRECT – Engineering and architectural services performed inside or outside the U.S. qualify if they are in connection with an actual or proposed foreign production/construction project.|
|“We are a manufacturing company, but we do not export our products. Our customers/distributors are the ones who export. We don’t qualify.”||INCORRECT – Manufacturers who sell to U.S. companies that ultimately export the products may qualify – e.g., manufacturer of chemical products that is ultimately exported by their customer/distributor.|
|“Our products are merely a component of a larger product made outside the U.S. and sometimes that product is imported back to the U.S. We don’t qualify.”||INCORRECT – Products that are shipped outside of the U.S. that become a part of another product generally qualify even if the final product returns to the U.S.|
|“We don’t manufacture. We grow or extract our product. We don’t qualify.”||INCORRECT - Goods grown or extracted in the U.S. and exported may qualify.|
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