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What is an IC-DISC structure? How is an IC-DISC formed? What are the potential benefits in forming an IC-DISC structure?

IC-DISC
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Peter J. Scalise
An Interest Charge Domestic International Sales Corporation (hereinafter "IC-DISC") structure allows highly advantageous tax benefits to taxpayers who export. An IC-DISC offers exporters permanent tax savings primarily resulting from a reduction in the tax rate on qualified dividends. It is available to manufacturers and distributors, and to all forms of business organizations, including C corporations, S corporations, partnerships, LLCs, and sole proprietors. Having an IC-DISC will not impact a company’s operations; it is transparent to customers.

First, an exporter must create a new corporate entity. Within 90 days, the new corporation files IRS Form 4876-A to elect IC-DISC status. This status exempts the entity from federal tax on its earnings. The new IC-DISC enters into a commission agreement with the seller of export goods whereby the IC-DISC will receive a commission on qualifying sales. Under the IRS treasury regulations, the IC-DISC is allowed to earn commission income totaling the greater of 50 percent of export profits or 4 percent of qualified export sales (i.e., subject to limitations). The IC-DISC commission is a current deduction to the U.S. exporter at ordinary income rates. When distributed, it becomes Qualified Dividend Income (hereinafter "QDI") to the IC-DISC’s shareholders. Permanent federal tax savings result from the rate differential on these two income types, a potential savings of 19.6 percent.

It should be duly noted that the flexibility allowed for IC-DISC ownership structures can provide for wealth-transfer, retirement savings, and executive compensation planning opportunities as well.
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