IC-DISC: Big Tax Breaks for Exporters
Tax breaks for exporters? — “Sounds too good to be true”, you say. That is the understandable reaction by most business owners, growers, and accountants alike when they first hear about the export tax incentive for small and medium manufacturers and growers known by the shorthand of “IC-DISC” — (Interest-Charge Domestic International Sales Corporation [IC-DISC]. The terrible name is probably one of the reasons many people aren’t aware of this tax incentive).
Fortunately, the tax savings are true. Unfortunately, while over 6,000 small and medium businesses and farms take advantage of the tax incentives of the IC-DISC, thousands more that are eligible are failing to do so.
The bottom line is that the tax laws provide an opportunity for a company to use an IC-DISC to have the tax on 50% of its export income reduced by more than 15%. Profits are taxed at the dividend rate (currently 20%) as opposed to ordinary income tax rates (top rate currently 35%). The tax deal agreed to in December 2010 extended the benefits of IC-DISC for two years.
What businesses can benefit from the IC-DISC? This is the biggest misunderstanding by business owners – the net is cast much wider for IC-DISC than people think. I find it easiest to think of three types of businesses that potentially qualify for the IC-DISC tax benefit:
1) A company that directly exports goods it manufactures or a farmer who directly exports his commodities. Example: Company X manufactures widgets in Ohio and ships to Canada. Farmer X grows corn and exports it to South America. Note: What counts as a manufactured good is also broader than many people realize – it can include software, films and many agricultural products.
2) A company provides architectural or engineering services that are conducted in the U.S. for a building/bridge built outside of the U.S. Example: An architectural firm based in Los Angeles designs a building that is built in China.
3) A company manufactures a good that is included in a product that is exported. This is probably the largest missed opportunity for businesses when it comes to the IC-DISC. IC-DISC tax incentives are also available in a situation where a company makes a component part that is included in a good that is exported. Example: Company Y makes tires that are included in a tractor that is shipped to South Africa.
So how does it all work? Naturally big tax savings like this aren’t a walk in the park. In a nutshell you are creating a separate entity (or sometimes several entities to maximize the tax benefits) – the “Corporation” part of IC-DISC. The exporter pays commissions to the IC-DISC. The commissions are deductible to the exporter, and the deemed or actual dividend payment of the commission income in the IC-DISC is taxed to the exporter’s shareholders/partners at the 20% rate (as opposed to being taxed as ordinary income – ex. 35% rate).
At the end of the day, the exporter receives a deduction of 35% on the commission payments made to the IC-DISC and on the other hand only pays a 20% tax rate on the income repatriated from the IC-DISC. The bottom line – a permanent tax savings for U.S. exporters and their shareholders of 10% or higher of net export income. Oh happy day!
The White House and Congress agree that a key to our nation’s economic recovery is strengthening our manufacturing sector and encouraging exports. The IC-DISC is tailor-made to encourage exactly such activity – providing a tremendous tax incentive for small and medium business owners and farmers who manufacture and export. The door is open for significant tax savings for these businesses – they just have to walk through it.
If you have questions, give Tracy Bressler of Bressler & Company Certified Public Accountants a call at 559.924.1225.
