Part 6 of Jim Sacher’s 12 Great Ideas for Tax Savings series
What to Look For
If you’re the owner of a profitable operating business selling into foreign countries, and most of your production costs are in the U.S., you may have an opportunity to gain considerable tax savings.
Since the passage of the Jobs Act of 2004, any U.S. company that directly exports goods it manufactures here may create an Interest Charge (IC) Domestic International Sales Corporation (DISC), or IC-DISC, to act as the “selling agent” for your operating business. What does this mean? An IC-DISC is an underutilized tax incentive that is “the bucket of money in the parking lot.”
The IC-DISC is the selling entity that sells your products to customers in foreign countries. It is a separate legal entity that earns a commission from the operating company for selling your products to foreign customers. These products must have most of their production costs incurred in the U.S., but there are otherwise few restrictions on the kinds of product sales that would qualify.
The opportunity also includes companies providing services, such as architectural or engineering, that are used in building structures in foreign countries as well as companies manufacturing goods that are included in an exported product.
- Sales commissions paid to the IC-DISC are tax deductible to the operating business
- The IC-DISC is a tax free entity so the taxable income it earns escapes taxation
- Dividends paid to shareholders are taxed at favorable dividend rates – 20%
- Profits may be accumulated for estate planning
- Income can be shifted to lower tax-bracket taxpayers
There are a number of complex rules on how to compute the sales commission, but properly structured, you can maximize the income that is sheltered by the IC-DISC.
Stay tuned for the next article in our series on R&M Capitalization Policy. If you have questions about the Interest Charge DISC or how you can take advantage of any of these tax savings ideas, please contact Jim Sacher at 440-605-7145 or firstname.lastname@example.org.