As long as the dividend rate remains at a lower rate than ordinary income rates, the Interest Charge – Domestic International Sales Corporation (IC-DISC) could be beneficial for your exporting business entity. Four years ago, companies were apprehensive about this due to the potential for increasing the tax rate on dividends. However, for those that went ahead and set up their IC-DISC, they still are benefiting from the permanent tax savings due to this rate differential.
In general, the following entities benefit from an IC-DISC:
- Manufacturers who export their products
- Manufacturers that sell products whose ultimate destination is outside the US
- Distributors who sell the US made products going outside the US
- Architectural and engineering firms who work on projects that will be constructed outside of the US
- Pass-through entities and closely held C-corporations that have over $1,000,000 of annual sales and $200,000 of taxable income
The exporting entity pays a commission to the IC-DISC which is deductible at ordinary rates. This income is paid to the IC-DISC and treated as a dividend and therefore taxed at the lower dividend rate. The calculation of the commission is based on net income from the international sales. This calculation may face potential IRS scrutiny and needs to be computed properly by the exporter. In addition, this commission calculation effects the calculation for the Section 199 (Domestic Production Activities Deduction).
Unsure if your business benefit from an IC-DISC? Contact our Cleveland and Akron tax professionals at 440-449-6800.