Export Incentive Awaits Your Application

By Donna Funk | June 13, 2011

For manufacturers who sell products internationally, there are only a few export tax incentives in the U.S. that can benefit their company.

The Interest Charge–Domestic International Sales Corp. is an export incentive that can offer a company up to a 20 percent lower tax rate for products sold internationally. Generally, the ordinary tax rate for exports of inventory items is 35 percent where the IC-DISC lowers this to 15 percent, an incredible strategy for selling a product in the international market.

Under this tax strategy, the exporter pays commissions to the IC-DISC. The commissions are deductible as an ordinary business expense by the exporter. The IC-DISC then pays a qualified dividend to the shareholder(s) of the IC-DISC. So while the exporter receives a deduction for the commission expense utilizing the 35 percent tax rate, the shareholder(s) of the IC-DISC only pay a 15 percent tax rate on the income from the IC-DISC. The end result is a permanent tax saving for U.S. exporters and their shareholders of 20 percent of net export income.

IC-DISC is time-sensitive because the benefits do not begin until a separate entity is in place and proper documentation of the relationship between the manufacturer and the IC-DISC is executed. A manufacturer must establish a separate, domestic corporation, maintain separate bank accounts and accounting books and file a U.S. income tax return—though it generally pays no U.S. income taxes. This year alone, Kennedy and Coe has already helped at least three companies set up this structure.

It is also important to note the Internal Revenue Service requires certain filings and elections be in place before a company can qualify. IC-DISC benefits are available on a go-forward basis, but not retroactively, which was the case with the former Extraterritorial Income Exclusion. This means the longer a taxpayer waits to form an IC-DISC, the fewer benefits it will receive.

Manufacturers who sell products destined for use internationally and directly export their products are solid candidates for the IC-DISC. This includes pass-through entities, privately held corporations and publicly traded companies. Architect and engineering firms working on products constructed abroad may also qualify for the incentive. In the right circumstances, distributors and wholesales and even business enterprises such as a feedlot may qualify.

While the structure and calculations may appear to be straightforward, it is important to set up the entity and structure correctly from the beginning. Our 75-year-old accounting and consulting firm has handled numerous IC-DISC structures for manufacturing clients to ensure they are set up correctly and continue to qualify year after year. To begin the process, a company should estimate its foreign sales and call its accounting partner to determine the estimated tax benefit and the next best steps. This estimate will help a company determine if the export incentive is something worth pursuing.
Accounting firms with IC-DISC experience can help a client maximize tax savings and ensure benefits take place that are in compliance with IRS rules and regulations. As the U.S. Congress continues to discuss tax rates this spring, there is potential the capital gains tax rate could change. These up-to-the minute details on tax code changes need to be thoroughly and constantly reviewed to keep current on IC-DISC.

It is safe to say that the IC-DISC is one of only a few export incentives still available and not being aggressively attacked by the European Union. It can only help a company to apply for the tax benefits. Consult your tax consultant to take advantage of the potential 20 percent tax savings with IC-DISC.

Author: Donna Funk
Manager, Biofuels Group, Kenney and Coe LLC
(800) 303-3241