IC-DISC Tax Benefit Illustration

Permanent tax savings begins with the exporting company deducting the commission it pays to the IC-DISC from its ordinary income, which is taxed at 35 percent. Tax law sets the commission rate, which is based on export sales revenue, as the greatest of either 50 percent of net income or 4 percent of gross income. Because the IC-DISC is tax exempt, tax is paid only on distributions to shareholders. Individual and pass-through company shareholders pay income tax on dividends at the capital gains rate of 15 percent.

Illustration of Basic Benefit of IC-DISC for Closely-Held S Corporations

Gross Sales

$20,000,000

Cost of Goods Sold

$16,000,000

Gross Margin

$  4,000,000

Selling, General and Administrative

$  2,000,000

Export Sales Net Income

$  2,000,000

Tax Rate

35%

Tax Paid

   $700,000

IC-DISC Commission (greater of):

50% of export net income

$1,000,000

4% of export gross sales

$   800,000

IC-DISC Commission Deduction 50%

 $1,000,000

Federal tax savings (35%)

  $  350,000

IC-DISC Dividend

$1,000,000

Federal Tax Rate

           15%

Tax Paid

    $350,000

   $150,000

Net Tax Savings from IC-DISC $700,000 - ($350,000 + $150,000)=$200,000

This opportunity should be examined for any closely-held U.S. company if even a portion of their products or services are believed to be used outside of the U.S.

If companies are already using the IC-DISC, they should be considered for the maximizing of allowable benefits using a “transaction by transaction” calculation. For more information about the process for establishing the IC-DISC and potential tax savings for your business, contact us.

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