California Export Guide 2017

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16 2017 California Export Guide
If your company earns significant
income from exporting products,
consider forming an interest
charge domestic international sales
corporation (IC-DISC). An IC-DISC
is relatively inexpensive to set-up
and operate, and it can reduce your
federal income tax rate on qualifying
export sales by up to 15.8 percent-
age points. The IC-DISC’s tax-saving
power is derived from the favorable
23.8 percent tax rate on qualified
dividends.
What Is an IC-DISC?
An IC-DISC is a tax-exempt, domestic “paper” corporation
that you create to receive commissions on your company’s
export sales. It must have its own bank account, keep separate
accounting records, and file a U.S. tax return. But it need not
have an office, employees or tangible assets, nor is it required to
perform any services.
An IC-DISC reduces your tax liability by converting a portion of
your export income, which is taxable at ordinary income rates as
high as 39.6 percent, into qualified dividends, which are generally
taxed at 23.8 percent under the present tax code regulations.
To qualify as an IC-DISC, a corporation must:
• Be incorporated in one of the 50 states or in the D.C.
• File an election with the IRS to be treated as an IC-DISC for
federal tax purposes.
• Maintain a minimum capitalization of $2,500.
• Have a single class of stock.
• Meet a qualified export receipts test and a qualified export
assets test.
The last requirement means that at least 95 percent of an IC-
DISC’s gross receipts and assets must be related to the export
of property whose value is at least 50 percent attributable to
U.S.-produced content.
How Does an IC-DISC Reduce Taxes?
Your company pays tax-deductible commissions to the IC-
DISC up to the greater of:
1. Four percent of your company’s gross receipts from
qualified exports, or
2. Fifty percent of its net income from qualified exports.
Because your company’s taxable income is reduced by the
amount of the commissions, ordinary income tax on those
amounts is avoided.
The IC-DISC, as a tax-exempt entity, pays no tax on the com-
missions.When the IC-DISC distributes its income to sharehold-
ers, they’re taxed at the qualified dividend rate which is lower
than the highest ordinary tax rate. The qualified dividend rate is
available only to individuals; thus, you’ll need to structure the IC-
DISC so that dividend payments are received by the individuals.
If your company is a pass-through entity — such as a part-
nership, S corporation or LLC— you can form an IC-DISC as a
subsidiary. Dividends the IC-DISC distributes to your company
will be passed through to individual shareholders and qualify
for the 23.8 percent rate.
However, if your company is a C corporation you’ll need to
have the corporation’s individual shareholders form the IC-
DISC. If you set up the IC-DISC as a subsidiary, the dividends
will be paid to the corporation and taxed as ordinary income.
What Are the Next Steps?
Professionals experienced in the set-up and maintenance
of IC-DISCs can help American exporters maximize the tax
benefits associated with their IC-DISCs. In-depth knowledge
of IC-DISCs, and the special rules associated with accounting,
enable this tax vehicle to be customized to meet the needs of
both the company and its owners, while creating substantial tax
benefits through a proven solution that is readily available to
any qualifying company.
What’s the Urgency?
An IC-DISC’s tax benefits aren’t retroactive —which means
these benefits are available only for export sales made after the
IC-DISC is established.
To learn more about IC-DISCs and how they may favorably
impact your business, contact a professional that specializes in
this area to avoid any missteps.
Greg Barragar, CPA, MST is a partner with GALLINA LLP,
specializing in the utilization of IC-DISCs.
For more information, visit us at .
Tax Breaks for Exporters:
IC-DISC for Manufacturers and Distribution
By Greg Barragar
Greg Barragar