The current global economic downturn and the volatility of supply chains have led many businesses to face declining sales and profitability, exacerbated by the impact of inflation. Running a business during these uncertain times is undoubtedly challenging, and economic experts suggest that the situation may further deteriorate. In order to navigate these difficulties, businesses must actively seek strategies to minimize costs, including optimizing their tax management.
The Interest Charge-Domestic International Sales Corporation (IC-DISC) is a tax incentive provided under IRC section 992 that can benefit certain types of businesses involved in international sales. The primary purpose of an IC-DISC is to provide a tax advantage to U.S. companies that export goods or provide certain export-related services.
To qualify for the IC-DISC tax benefit, the business must be involved in exporting goods that are manufactured, produced, grown, or extracted in the United States. This includes companies engaged in direct or indirect exporting, as well those offering export-related services.
A qualified business must establish a separate entity, the IC-DISC, to which it can allocate a portion of their export-related income by paying IC-DISC commission. The commission is determined as the higher of 4% of qualified export gross receipts or 50% on the taxable income from sale of export property. A properly structured IC-DICS entity is tax-exempt for federal income tax purposes.
Illustration:
Let’s consider the example of Company X, a C-corporation that manufactures widgets in the United States and exports all of its widgets to Canada. In 2022, Company X records $100M of gross revenue and $5M of taxable income. By implementing an IC-DISC structure, Company can pay $4M of commission (greater of 4% of qualifying export sale or 50% of qualifying taxable income) to the IC-DISC entity. As a result, Company X reports $1M of taxable income, while the IC-DISC remains tax-exempt for federal income tax purposes. and the IC-DISC is subject to zero tax, as it is a tax-exempt entity for federal income tax purpose. By implementing the IC-DISC structure, Company X saves $840,000 in federal taxes.
| Company X | With IC-DISC | Without IC-DISC |
| Taxable income before commission expense | $5,000,000 | $5,000,000 |
| IC-DISC commission expense | $4,000,000 | - |
| Taxable income | $1,000,000 | $5,000,000 |
| Federal tax at 21% | $210,000 | $1,050,000 |
The eligibility and benefits of an IC-DISC can be complex and highly dependent on specific circumstances. It is crucial to consult with a qualified tax advisor experienced in international tax matters to determine if your business is an ideal candidate for utilizing an IC-DISC.
By leveraging the potential tax advances offered by an IC-DISC, businesses engaged in exporting can optimize their tax positions and enhance their financial performance during these challenging times.