By Jeff Brooks, CPA, CGMA | Principal – Tax Jeff Brooks head shot

The American Taxpayer Relief Act of 2012 (aka “fiscal cliff” tax bill), which took effect in January 2013, made the IC-DISC (Interest Charge – Domestic International Sales Corporation) tax incentive permanent. However, many U.S. companies that export goods are still not taking full advantage of this tax incentive due to unfamiliarity and perceived complexity. Generally, an IC-DISC can reduce overall income tax liability by 20% or more, so it’s worth exploring further.

Measuring the Tax Benefit

Typically, this is how the tax incentive works: The exporting company pays a commission to the IC-DISC (a separate entity, but with common or related shareholders to the exporting company).   The commission is deducted from the net income of the exporting company, thus reducing its tax liability. The IC-DISC commission is ultimately taxed at the preferential qualified dividend rate. The reduced net income for the exporting company is taxed at the ordinary rate.

In the following example, Company A is an exporter with no IC-DISC. Company B is an exporter with an IC-DISC to which sales commission is paid. Comparing our examples, Company B with the IC-DISC saves $79,000 in net income taxes.

IC-DISC calculation table

Good candidates for IC-DISC are U.S. companies that directly export products, U.S. companies who sell products destined for overseas use (i.e. components of other exported goods), and architectural or engineering firms that work on construction projects that will be built abroad. Generally, companies with annual export sales starting at $1 million will typically get a sizable enough benefit to offset the costs of establishing the IC-DISC and administering reporting for the tax incentive.

An important condition to consider is the tax incentive only applies to products shipped AFTER an IC-DISC is setup. Therefore, consider it now and take action immediately if you think your company qualifies.  The international tax team at AGP can assist you with estimating the tax benefit, working through the specific rules, establishing an IC-DISC, and all related filings.

Contact me today at jbrooks@applegrowth.com or 330.867.7350 to get started.

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