An Interest-Charge Domestic International Sales Corporation (IC-DISC) can be a powerful tax-savings opportunity for many companies exporting products.
An IC-DISC is a domestic corporation that primarily engages in foreign sales and exporting activity. Many years ago, the U.S. government created this law as a means to promote U.S. business activities it deemed economically beneficial. In today's competitive global landscape, any cost-saving measures are coveted. The beauty of the IC-DISC structure is that in order to capture the tax benefits, very little, if any, change is required from how a business is already being conducted. In general, the structure is invisible to the business' customers, but the benefits will save money.
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In its current form, the IC-DISC provides a permanent federal income tax savings of nearly 16 percentage points for qualifying U.S. exporters. Some of these savings can be further parlayed through the deferral mechanisms that have been mainstays of the IC-DISC rules for many years. The IC-DISC is not a listed or reportable transaction. In fact, former regulations specifically acknowledged that IC-DISCs were not tax shelters. Regarded by tax practitioners as a somewhat lackluster tax-deferral vehicle, the IC-DISC largely went ignored for more than 20 years. But, the introduction of the reduced tax rate for qualified dividends under the Jobs and Growth Tax Relief Reconciliation Act of 2003, as currently extended through the American Taxpayer Relief Act of 2012, has resuscitated the IC-DISC. In limited circumstances, the permanent federal tax savings could be up to 19.6 percent.
The IC-DISC also has a number of sophisticated features that can be tailored to help businesses meet objectives and goals. Some IC-DISC advantages and benefits include:
In addition to other attributes, the IC-DISC has better staying power than the other export-oriented tax regimes. U.S. trading partners decried the legitimacy of the original DISC, the foreign sales corporation and the extraterritorial income (ETI) exclusion. However, the IC-DISC, which was added to the tax code in 1984, has not been challenged.
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