By Derek B. Rawls, CPA, MST
Gray, Gray & Gray, LLP
American companies exporting goods – and certain services – may be able to enjoy significant federal income tax savings through a little-known instrument known as an interest charge domestic international sales corporation (IC-DISC).
You do not need to be a huge exporter to take advantage of an IC-DISC (say “icy disk”). The types of businesses that might benefit by establishing an IC-DISC includes direct exporters and those whose products make up components of exported items. But you do not have to be a manufacturer at all. Architects, engineers and software developers are a few examples of non-manufacturing businesses who can take advantage of an IC-DISC.
Take, for example, a company that manufactures rubber stylus pen tips and sells them to a pen manufacturer here in the U.S. The pen manufacturer then exports the final, fully assembled product. Even though the pen tip manufacturer is not a direct exporter, they are qualified to set up an IC-DISC as a commissioned sales company for the components that are eventually shipped overseas as part of the final product.
Similarly, an architecture or engineering firm providing services for a construction project being built outside the U.S. may be able to use an IC-DISC to reduce income tax on the “exported” work.
It is a relatively simple process to set up an IC-DISC, requiring minimal capital. Generally, the owners of the existing operating company form a new corporation and elect to treat this newly formed corporation as an IC-DISC for U.S. federal income tax purposes. The new IC-DISC company then functions as a commission-based exporter. Calculated commissions are paid from the operating company to the IC-DISC as an ordinary deduction, and then the commissions are paid back to the operating company as dividends.
An IC-DISC can be an effective tool for exporters of U.S. manufactured products or certain qualifying services. Properly planning and evaluating the establishment and use of such a strategy with the help of a qualified tax advisor could result in income tax savings of up to 16% for some businesses. If you are an exporter, manufacture components for export, export software, or perform architectural or engineering work overseas, please contact me about the steps necessary to establish an IC-DISC for your company.
Derek B. Rawls, CPA, MST is a Partner of our Tax Department at Gray, Gray & Gray, LLP, Certified Public Accountants, Canton, MA. He can be reached at (781) 407-0300, or via email at email@example.com