IC-DISC: AN OLD TAX PLANNING TECHNIQUE REBORN

REDUCE TAXES IN HALF ON EXPORT SALES

Rather then paying ordinary federal income tax of 35% or 39.6% and payroll taxes of 15.3% on your export sale profits, you can pay the applicable capital gain rate of 15% or 20%. Section 102 of the American Taxpayer Relief Act of 2012 enacted on January 2, 2013 made these rates permanent.

Dependent upon your State, you may also avoid State business income taxes.

What's the hitch?

Answer: Your export sales must meet the following general guidelines:

  1. Qualified receipts include products with USA content of 50% or more, services including engineers and architects and leases and rentals.
  2. Sale to a foreign country including adjacent countries of Canada and Mexico. Alternatively, an item constituting an isolated functional product exported within one year by your customer qualifies.
  3. Benefit is equal to 50% of foreign sales taxable income or 4% of export sales either limited to combined taxable income.

Annual Tax Benefit Example Using 15% Capital Gain Rate


Target 4% of Export Sales
Capital Gain Tax Rate 15%
Ordinary Income Rate 35%
IC-DISC Tax Savings 35%-15%=20%

$170,000
$25,500
$59,500
$34,000

Effective for 2013, the Affordable Health Care Act increased the Medicare tax rate from 2.9% to 3.8% (up .9%) and introduced a new 3.8% tax on net investment income of high income taxpayers. Depending upon the shareholder tax profile, these taxes may reduce the marginal benefits of the IC-DISC by 2.9% (.9% vs 3.8%.) Thus, in circumstances where the IC-DISC commission is converting income from earned to investment income and those rates apply, the tax saving would drop as follows: 1) for those in the 39.6% bracket from 19.6% to 16.7% (19.6% less 2.9%) and, 2) for those in the 35% bracket, from 20% to 17.1%.

Red Tape?

Answer: There is, but we offer a turn key solution which includes:

  • Assessment of benefits to your business
  • Preparation of all paper work and legal documents for your advisers to review and approve
  • Creation of the DISC
  • Transaction monitoring and compliance
  • DISC Tax return preparation
  • Liquidation at the end of the benefit term
  • How does it work?

    Answer: The transactions basically creates a deductible dividend to shareholders utilizing a Domestic International Sale Corporation or DISC. Under a formal arrangement, the manufacturer pays a 4% sales commission to a federally tax exempt corporation designated as a DISC. The manufacturer is entitled to deducted the 4% commission but the income to the DISC is exempt. The DISC in turn declares a dividend to its shareholders who pay federal income tax on those qualified dividends at the current capital gain tax rate of 15%. Certain year end ratios of assets must be maintained by the DISC, a formal commission agreement is followed, and strict adherence to payment and dividends timing.  This necessitates careful monitoring program which is the service we provide.

    To read more please download our power point presentation, read our published article or email us for more information.

    We invite you and your advisors to contact our team for a conference call to confidentially discuss your facts to determine if a DISC should be part of your tax plan.


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