Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

IC-Disc...Is it Right for Your Business?

Author: Scarinci Hollenbeck, LLC

Date: February 7, 2017

Key Contacts

Back

Now that President Trump has made it a priority to bring back manufacturing to the United States, now might be the time to consider an IC-Disc (Interest Charge Domestic International Sale Corporation).

An IC-Disc reflects a special tax preference enacted by Congress to strengthen export sales. If a domestic corporation qualifies and elects to be treated as an IC-Disc, it is permitted to defer up to $10,000,000 from qualified export receipts per tax year.

IC-Disc

The IC-Disc is a tax-exempt entity, however, the shareholders are taxed on the certain income of the IC-Disc whether or not it is distributed. The character of the commission income is a dividend; if not distributed during the year, it is a constructive dividend at the end of the year. Any remaining taxable amounts are taxed when actually distributed to the shareholder or where the corporation ceases to qualify as an Interest Charge Domestic International Sale Corporation. Obviously, the IC-Disc provides an opportunity to defer income. To offset this tax advantage, the shareholders are subject to an interest charge based on the tax that would otherwise be due. The interest charge, reported on Form 8404, is the deferred tax liability multiplied by the base period T-bill rate. In this environment of low-interest rates, the interest charged would be very low.

Tax benefit of an IC-Disc The other main tax benefit of using an Interest Charge Domestic International Sale Corporation is that the difference between qualified dividend rates and ordinary income rates is the tax benefit afforded to the shareholders. This benefit can provide substantial savings. A US exporter would be able to convert a portion of the export income into dividends thereby converting the tax rate from 35% to 20%. Example – exporting company XPE forms an Interest Charge Domestic International Sale Corporation. It pays and deducts commission to the IC-Disc. The commission reduces otherwise taxable income.

The IC-Disc pays no tax on the commissions but still pay interest on the deferred income and the shareholders are not taxed until the earnings are distributed as dividends – currently 20%. Qualifications of an IC-Disc An Interest Charge Domestic International Sale Corporation must meet each of the following tests

  1. it must be a domestic corporation;
  2.  it must have only one class of stock and must have stated value of $2,500 on each day of the taxable year;
  3. it must elect disc status; at least 95% of its gross receipts must be export related; at least 95% of its assets, taken at the adjusted basis at the close of the taxable year must be export related; and (4) the IC-Disc cannot be, among other things, an S corporation and will usually be a C corporation. The Interest Charge Domestic International Sale Corporations is often a separate entity typically established in a state which has favorable state law tax provisions.

There are transfer pricing rules which govern IC-Discs but generally, the Interest Charge Domestic International Sale Corporation can realize taxable income equal to 4% of the qualified export receipts on the sale by the IC-Disc plus 10% of the export promotion expenses, sometimes known as the “4% Method.” There are other intercompany pricing rules that could be used as well. As the IC-Disc itself is not a taxable entity, the shareholders are taxed on the earnings of the Interest Charge Domestic International Sale Corporation as dividends received on the last day of each tax year. Notably, the EU has not challenged IC-Disc’s. Moreover, coupling Interest Charge Domestic International Sale Corporations with Section 1199 can achieve additional saving. Finally, an IC-Disc may be used for wealth planning.

If your company can benefit from forming anInterest Charge Domestic International Sale Corporation or if you have any questions regarding the matter, please contact me, Frank Brunetti, at 201-806-3364.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
How to Conduct a Fair and Legal Employee Termination in 2025 post image

How to Conduct a Fair and Legal Employee Termination in 2025

Ongoing economic uncertainty is forcing many companies to make tough decisions, which includes lowering staff levels. The legal landscape on both the state and federal level also continues to evolve, especially with significant changes to the priorities of the Equal Employment Opportunity Commission (“EEOC”) under the Trump Administration. Terminating an employee is one of the […]

Author: Angela A. Turiano

Link to post with title - "How to Conduct a Fair and Legal Employee Termination in 2025"
Admin Dissolution for Annual Report: What You Need to Know post image

Admin Dissolution for Annual Report: What You Need to Know

While filing annual reports may seem like a nuisance, failing to do so can have significant ramifications. These include fines, reputational harm, and interruption of your business operations. In basic terms, “admin dissolution for annual report” means that a company is dissolved by the government. This happens because it failed to submit its annual report […]

Author: Dan Brecher

Link to post with title - "Admin Dissolution for Annual Report: What You Need to Know"
What Is Antitrust Litigation Law? post image

What Is Antitrust Litigation Law?

Antitrust laws are designed to ensure that businesses compete fairly. There are three federal antitrust laws that businesses must navigate. These include the Sherman Act, the Federal Trade Commission Act, and the Clayton Act. States also have their own antitrust regimes. These may vary from federal regulations. Understanding antitrust litigation helps businesses navigate these complex […]

Author: Robert E. Levy

Link to post with title - "What Is Antitrust Litigation Law?"
Dissolving Your Business: Essential Legal Steps to Protect Your Interests post image

Dissolving Your Business: Essential Legal Steps to Protect Your Interests

If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]

Author: Christopher D. Warren

Link to post with title - "Dissolving Your Business: Essential Legal Steps to Protect Your Interests"
The Role of Corporate Restructuring in Mergers & Acquisitions post image

The Role of Corporate Restructuring in Mergers & Acquisitions

Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]

Author: Dan Brecher

Link to post with title - "The Role of Corporate Restructuring in Mergers & Acquisitions"
Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public post image

Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public

Cryptocurrency intimidates most people. The reason is straightforward. People fear what they do not understand. When confusion sets in, the common reaction is either to ignore the subject entirely or to mistrust it. For years, that is exactly how most of the public and even many in law enforcement treated cryptocurrency. However, such apprehension changed […]

Author: Bryce S. Robins

Link to post with title - "Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!