The IC-DISC has long been a planning tool in the CPA’s toolbox for clients with significant international sales, but with recent tax law proposals, is it going away? One of the major benefits of implementing an IC-DISC is to take advantage of the tax rate difference between corporate and individual qualified dividend rates. Current tax law proposals are pushing to reduce corporate tax rates to 20%, so the IC-DISC benefit could be eliminated.
What is an IC-DISC anyway? IC-DISC is an interest charge domestic international sales corporation. It can be used as a tax benefit for manufacturers and other types of businesses that deal with goods produced in the U.S. that will be exported internationally. The IC-DISC needs to be set up as a separate corporate entity and is exempt from federal income tax under Sec. 991.
The related manufacturer or supplier of export goods pays a tax-deductible commission to the IC-DISC, which in turn distributes the commission income to its shareholders as qualified dividends. The commission is computed based on foreign taxable income and by using the IC-DISC, the ordinary income is converted to qualified dividend income. The related manufacturer or supplier would receive the benefit of a deduction at the corporate rate (typically 35%) and the shareholders would receive qualified dividend income taxable at 20% for a potential 15% tax savings.
Tax Law Proposals
Tax plans proposed by President Donald Trump and House Speaker Paul Ryan indicate that corporate tax rates could be reduced. Trump’s plan proposes that corporate tax rates should be lowered from 35% to 15% for all businesses that retain a profit. Ryan’s plan proposes the corporate tax rate be reduced to 20%.
The two plans differ on the tax structure for capital gains and qualified dividends. Trump’s proposal maintains the current rate structure of 0% for individual taxpayers in the 10% and 15% tax brackets, 15% for taxpayers in the 25%, 28%, 33%, or 35% income tax brackets, and 20% for individuals in the highest current tax bracket of 39.6%. Ryan’s plan reverts to a prior law that excludes 50% of income and treats it as ordinary (so lower earners would actually see a tax increase).
Based on these two plans, the main tax incentive of an IC-DISC could go away. While no one can predict what will happen with the current tax proposals, the Skoda Minotti Tax Group can review your current structure to ensure you are taking advantage of the existing range of tax incentives that support manufacturing and exporting businesses. We will continue to monitor progress on tax reform and keep you posted on developments that may affect your business.