January 25, 2011
Interest Charge - Domestic International Sales Corporation
Interest Charge – Domestic International Sales Corporations were developed by Congress in 1971 and are better known as IC-DISC’s. Although changes have been made over the years as income tax rates have changed, the extension of the Bush Tax Cuts as signed by President Obama on December 17, 2010 have extended the little known provision for IC-DISC tax benefits for exporters in the U.S. Many tax planning opportunities exist in this area as the incentive here is often up to 10% tax savings on profits.
An IC-DISC essentially allows a domestic U.S. exporter to allocate profits on goods grown, manufactured, produced or extracted in the U.S. to a special domestic subsidiary called IC-DISC. The IC-DISC is a legal vehicle to which the parent (manufacturer) pays a commission of the greater of 50% of net export income or 4% of gross export receipts.
What are the benefits for setting up an IC-DISC?
- The commissions paid by the export company to the IC-DISC are fully deductible.
- An IC-DISC is not subject to the regular corporate income tax.
- Under one planning alternative, the IC-DISC can pay the commission earnings as a dividend to its individual shareholders. The shareholders then pay the tax at a reduced rate of 15%. It is important to note that the shareholders are taxed on both the actual and deemed dividends from the IC-DISC. This translates to a 20 cent per dollar tax decrease on the export profits to the manufacturer.
To qualify as an IC-DISC, the domestic corporation must satisfy the following two tests:
- Qualified export receipts test: 95% of the gross receipts of the IC-DISC must constitute items such as commissions from sales of export property, rents for the use of such property outside the U.S. or services related to such property.
- Qualified Export Assets Test: 95% of the assets of the IC-DISC must be qualified export assets such as accounts receivable, temporary investments, export property or loans to producers.
There are three requirements for an IC-DISC to receive income from the sale of export property:
- The property must contain at least 50% U.S. materials.
- The property must be manufactured, produced, grown or extracted in the U.S. by someone other than the IC-DISC. To qualify a product as being manufactured in the U.S., consider the following:
- 20% or more of conversion costs are incurred in the U.S.
- Substantial transformation of the product occurs in the U.S.
- The operations in the U.S. are generally considered to constitute manufacturing
- The property must be held primarily for sale, lease or consumption outside the U.S.
- The destination test requires that the property must be delivered to a freight provider to ultimately be shipped abroad or sold to a U.S. customer who will export the product as final (with no changes) within one year of the sale.
If more than one manufacturer is involved in the production of a product that qualifies, only the last manufacturer qualifies for the benefit of an IC-DISC. Ideal candidates for the creation of an IC-DISC include light manufacturers, companies who recycle and export goods as scrap abroad and engineers and architects with foreign based construction projects.
The IC-DISC benefits are only eligible once the IC-DISC entity has been incorporated and the proper IRS elections filed.
Please consult your Marcum Tax Professional with any questions regarding the creation and benefits of an IC-DISC to your business today.