Last of a Dying Breed-the Exporter’s Tax Break

I taught him everything I know!

Several SME’s have asked me if there are any financial incentives to exporting.  Sometimes I forget the obvious.   Let’s review the IC-DISC.

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HISTORY
In 1971, the Babyboomerozoic college era, US Congress created a provision to the tax code called a DISC (a Domestic International Sales Corporation).  The DISC was created to subsidize exports of US made goods through the income tax code.  It was essentially a paper corporation with no activity.  DISC’s were not subject to Federal Income Tax.  The tax on the earnings of the DISC were at a reduced dividend tax rate.  DISC’s were challenged by the European Community in 1981 as an export tax subsidy and the IC-DISC (Interest Charge-DISC) was created in 1984.  The IC-DISC, however, is still alive and well and taxes the earning of the IC-DISC at the corporate dividend tax rate.

DEFINITION
The IC-DISC is a separate tax exempt entity that is paid a commission on export sales of the related US corporate supplier organization.  The IC-DISC pays no federal income tax on its commission income.  When the IC-DISC distributes its income to its shareholders, it is taxed at the qualified dividend tax rate (much lower than the corporate income tax rate).  It is still largely a paper entity at most companies. 
The commission paid to the IC-DISC is the greater of:

• 50% of the net profits earned on export business, or
• 4% of the gross receipts on exports that are manufactured, mined or farmed in the US

The commission earned is dividend income and an expense to the Parent company.  The exporter can own the IC-DISC-it can be formed as a subsidiary.  Ownership of the IC-DISC should be held by an individual or flow through entity (LLC, S-corp or partnership) get the greatest benefit of the IC-DISC.   C-Corps can create an IC-DISC, however, this is not my target client base.  They also have the big bucks and brains to conduct such an investigation.

QUALIFICATIONS
An IC-DISC must:

• Be a domestic corporation
• File an election with the IRS to be treated as an IC-DISC
• Have a minimum of $2500 of capital
• Have a single class of stock
• Meet a 95% qualified export asset test and a 95% qualified receipts test.

The IC-DISC is a separate organization from the parent organization.  It must have its own bank account and separate accounting records.  IC-DISC benefits are not retroactive-benefits are available only for export sales made after the IC-DISC is established.
Distributors that export US manufactured goods, including export management companies, are also eligible to enjoy IC-DISC benefits.  Engineering or architectural services (for work generated domestically) charged on foreign construction projects are also eligible to enjoy IC-DISC benefits.  Companies that manufacture components goods that are included in a product also quality for IC-DISC benefits.  Thus, the applicability of the IC-DISC is pretty wide.

CONCLUSIONS
The IC-DISC was created by the Executive and Legislative branches to strengthen manufacturing and encourage exports-it does.  I have noted the basic favorable tax benefits of the IC-DISC for an SME.   There are additional benefits for estate planning and interest income deferral that I have omitted.   I don’t claim to be a tax or accounting expert on this subject-one should seek advice from their accounting firm to create an IC-DISC and its ongoing management. 

Good selling!