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Export Incentives

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Background

Companies in various industries who sell or lease their products internationally are taking advantage of a powerful incentive to lower their tax liabilities and increase cash flow. The Interest-Charge Domestic International Sales Corporation, or IC-DISC, allows for qualifying companies to defer U.S. income tax on a portion of its export profits by allocating those profits to the IC-DISC. Companies may further realize a permanent tax savings by taking advantage of the qualified dividends rate.

In recent years, two changes in tax policy have made the IC-DISC one of the most successful tax strategies for exporters – (1) the phase-out of the Extraterritorial Income Exclusion, and (2) the lower rate of tax on dividends.

Key Concepts

The IC-DISC strategy primarily involves two entities – the Exporting Company, an existing US-based company exporting products to foreign markets, and the IC-DISC, which the Exporting Company forms in order to facilitate tax savings. The Exporting Company may exist in any number of industries:

  • Manufacturing
  • Software Development
  • Defense Contracting
  • Architecture & Engineering
  • Biotech / Life Sciences
  • Agriculture
  • Wholesale / Distribution.

The Exporting Company realizes tax savings by paying a commission based upon foreign sales to the IC-DISC. Since the IC-DISC is a tax-exempt entity, the IC-DISC does not incur a tax liability for the commission income.

The Benefit

The IC-DISC provides several benefits to Exporting Companies. The main benefits consist of:

Converting Ordinary Income to Dividends – The main benefit of the IC-DISC for most Exporting Companies is the preferred tax treatment of foreign trade income. Through the IC-DISC, an Exporting Company can convert 50 percent of its foreign trade income from ordinary income qualified dividends, Taxpayers can realize this permanent, real-time benefit allows exporters to significantly reduce their tax liabilities.

Note: As the Tax Cuts and Jobs Act of 2017 phases in, changes in effective tax rates on ordinary income may effect this rate differential.

Interest-Charge Deferral – Alternatively, an Export Company may utilize the IC-DISC to defer up to $10 million of qualified export revenue. The Export Company must pay a nominal interest charge for the deferred revenue attributable to the DISC.

The A&M Advantage

Alvarez & Marsal is a market leader in assisting small and middle market companies take advantage of the IC-DISC. Our team of professionals possesses extensive experience with helping clients optimize IC-DISC formation, maximize the tax benefit through an exhaustive transaction-by-transaction analysis of export sales, and maintain the IC-DISC benefit going forward. A&M works with our client’s CPAs to integrate the IC-DISC into the client’s overall tax strategy.

A&M offers a no-cost, no-obligation assessment of the IC-DISC benefit for potential clients. Contact us for additional information.