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.
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.
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:
An IC-DISC must:
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.
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.