TARGET AUDIENCE: MANUFACTURING AND DISTRIBUTING COMPANIES, M&D INDUSTRY, RESEARCH AND DEVELOPMENT COMPANIES, INTERNATIONAL EXPORTERS

Although this tax incentive has been a part of the tax code for nearly four decades it’s often been ignored, presumably in the presence of more attractive tax initiatives related to income generated overseas.

• The general concept of an IC-DISC is fairly simple. A U.S. manufacturer establishes a “shell” company — an IC-DISC — and then pays its IC-DISC a percentage of the company’s export revenue, also known as commissions. Commissions can be up to 4% of an exporter’s qualified export receipts, or 50% of their taxable income — whichever is higher.

• Because an IC-DISC is tax-exempt, the company doesn’t pay taxes on these commissions. Distributions of commissions to shareholders are subject to the 15% capital gains tax rate. Therefore, based on the ordinary 35% tax rate, the manufacturer can enjoy a 20% tax break on the commission paid to the IC-DISC.

• A company can also choose not to immediately distribute IC-DISC earnings to shareholders, instead deferring these earnings by lending them back to the exporting company. With interest rates at historic lows, many companies are incorporating IC-DISC deferrals into their growth strategies.

• Even though deferral-fund usage restrictions apply, companies that use IC-DISC loan money for research and development (R&D) may enjoy additional tax breaks thanks to R&D tax incentives. Exporting companies should keep in mind, however, that they can defer only the predetermined commission percentage — 4% of exporters’ qualified export receipts, or 50% of their taxable income— of up to $10 million in annual income.

• Manufacturers also can get creative, using IC-DISCs in a number of other financial and operational strategies. For example, naming employees shareholders of IC-DISCs can help motivate them to work toward higher export sales.

• IC-DISCs also can be used as a means to facilitate succession planning, such as using them to generate cash to help shareholders pursue buyout plans or allowing family members to benefit from export income by being named as IC-DISC owners.