Did you know that owner-managed exporting businesses can take advantage of significant tax savings through international tax services such as the creation of an interest charge-domestic international sales corporation (IC-DISC)? The incentive is broader than you might think – for example, tires manufactured in the United States may qualify if they are installed on a vehicle that is later exported overseas.

Although the most recent tax changes have decreased the savings associated with this benefit, it is still a viable savings strategy, producing a typical savings of 11.2 percent on export income.

Below are some frequently asked questions Doeren Mayhew’s international tax accountants receive about this tax planning tool.

How does an interest charge-domestic international sales corporation work?

A U.S. exporter can set up a separate legal entity, known as an IC-DISC. The exporting company then pays a commission to the IC-DISC: The greater of 4 percent of its export sales, or 50 percent of the combined taxable income from export sales. The IC-DISC does not pay income tax on the commission income from the export sales. Instead, it takes the profits and pays a dividend to the owners of the IC-DISC.

Why should I consider an IC-DISC?

There are several benefits to consider, including:

  • Permanent tax savings on your global sales – 23.8 percent tax rate (which includes the Medicare tax on net investment income) versus 35 percent corporate tax rate on 4 percent of export sales
  • One-time tax deferral opportunity
  • Ability to leverage cost of capital
  • Means to facilitate your succession or estate planning

Consider this sample savings scenario:

ABC Company has $10 million in export revenues and pays $400,000 in commissions to the IC-DISC, which reduces taxable income by $400,000 (commission paid to the IC-DISC). The $400,000 is distributed to owners as a dividend—taxed at only 23.8 percent as opposed to the regular tax rate of 35 percent. The owners pay $95,200 in taxes instead of $140,000 – a savings of $44,800.

How do I qualify?

For an IC-DISC tax savings program to work, your export profits must be earned on items manufactured in the United States and shipped out of the country. Goods sold and shipped to a reseller, and then shipped out of the country (within one year) are also covered as export sales.

Some services also qualify as export profits; however any engineering or construction services related to mineral exploration are excluded. Imported items that are modified in the United States, then exported, as well as items manufactured and sold overseas, also do not qualify.

To explore exporting and whether you may qualify for an interest charge-domestic international sales corporation, contact our international tax accountants in MichiganHouston or Ft. Lauderdale.