If your manufacturing company has $1 million or more in export sales each year, or if you sell products that are ultimately destined for use overseas, you may benefit from a tax tool that was extended along with the Bush tax cuts in December.
What is IC-DISC?
The Interest Charge – Domestic International Sales Corporation, or IC-DISC, can help you lower your effective tax rate on export net income if your products contain at least 50 percent US-based content.
Architectural and engineering firms that work on projects that will be constructed abroad, even though they perform the work in the United States, are also eligible. In some cases, distributors may also benefit from this tax treatment.
How much could you save in taxes with an IC-DISC? One Ohio manufacturer with about $5 million in export sales almost doubled its deduction after a review of the corporate return, which resulted in an additional $75,000 in tax savings. Your savings can vary greatly depending on your company’s profit margin.
You’ll need to use an attorney to set up the IC-DISC entity and to create the commission agreement. The IC-DISC must obtain its own EIN number, and maintain separate bank account(s) and accounting records. The IC-DISC is required to file an annual U.S. income tax return, even though it pays no U.S. income taxes. The manufacturer takes a deduction for the commission paid on its corporate tax return.
The IC-DISC benefit is prospective only, so commissions on export sales cannot begin until the IC-DISC is established. There are several methods available to calculate the commission paid to the IC-DISC corporation. Companies can switch the calculation method they use from one year to the next.
The most advantageous aspects of the IC-DISC arrangement are not expected to last past the 2012 tax year. However there may still be some tangible benefits to your company going forward once the benefit expires. For additional information on how the IC-DISC structure can benefit your company, contact Christopher Axene, CPA, at 614-889-8725, or click here to email Chris. In a brief consultation he can assess your situation and determine whether the IC-DISC structure makes sense for you.