TAX SAVINGS ON EXPORTS THROUGH IC-DISCS
Congress established what is known as the “IC-DISC” program in order to promote US Exports. The program, unfortunately, has been largely overlooked by most exporters. The failure to take advantage of this program has resulted in substantial lost profits for U.S. exporters, not to mention the loss of a competitive advantage against foreign competition. It is not too late. So long as there continues to be a differential between the capital gains rates and the corporate tax rates, these benefits can still be attained.
Here’s how it works. The U.S. government allows U.S. exporters to form a corporation and designate it as an “IC-DISC.” Essentially, the IC-DISC is a “paper” corporation designed to receive “commissions” on export sales made by the U.S. exporter. Those commissions are deducted from the overall selling price of the goods and paid over to the IC-DISC. The IC-DISC pays no corporate tax on those commissions. The commissions are then distributed to the shareholder of the IC-DISC. This distribution is a dividend, and will be taxed at the capital gains rate, which is currently 15%. In effect, the U.S. exporter is converting a 35% corporate tax on income representing the commission, to a 15% capital gain.
Let’s take a simple example using one of the three commission rates available (4% of export sales). Company X, a Pennsylvania “S” corporation, has $6,000,000 in export sales. With $6,000,000 of sales, a commission of $240,000 (4% of $6 million) will be paid to the IC-DISC, resulting in a deduction of $240,000 and consequently a tax reduction of $84,000 (35% of $240,000) for Company X. Meanwhile, the IC-DISC pays no corporate income tax on the commissions it received. It then distributes the commissions as a dividend to its shareholders. That dividend is taxed at the capital gains rate (15%), or $36,000. Therefore, on $6,000,000 of export sales, the exporter realized a net benefit of $48,000 ($84,000 tax savings for Company X less $36,000 tax paid by IC-DISC shareholders).
There are different methods to determine the amount of commissions permitted to be paid. Also, only the export of U.S. products qualifies. Some of the rules governing commissions and what constitutes a U.S. product can become quite complicated, and there are a number of variations to assist exporters to maximize the benefit. One “rule of thumb” that generally proves true, however, is that for every $1,000,000 in export sales, there is a corresponding benefit to the U.S. exporter of at least $8,000. This rate of benefit is attained at the current tax rates but, again, similar benefits will continue to accrue so long as there is a differential between capital gains and corporate tax rates and the IC-DISC provisions remain in the Code.
Please contact Louis A. Dejoie, Chair of our International Practice Group at (717) 237-5387 or , or Tim Finnerty, Co-Chair of our Business Group at (717) 237-5394 or for additional information.
© 2012 McNees Wallace & Nurick LLC
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