Income generated from export sales is typically taxed at the highest rate possible, which often deters business owners from pursuing this type of revenue. However, for enterprises that do generate income from export sales, the Interest Charge Domestic International Sales Corporation (IC-DISC) designation may provide some much-needed tax relief. When leveraged appropriately, the IC-DISC can reclassify export sales revenues into qualified dividends. Once re-characterized, these dividends are then taxed at a lower rate.
Benefits of IC-DISC Reclassification
Businesses that meet the guidelines for IC-DISC designation can reap several significant financial benefits. Qualified income generated from export sales can mean:
- Lowered federal tax burden on the exporter
- Protection against redundant duties
- Decreased marginal tax rate
Most importantly, tapping into the benefits of the IC-DISC classification can keep working capital in a business owner’s corporate accounts to drive overall business value.
Many Qualifying Businesses Fail to Utilize IC-DISC Opportunities
The IC-DISC program provides several operational advantages to organizations that manufacture or distribute U.S. products for global export. Still, every tax year, many smaller enterprises don’t utilize this powerful tax reduction opportunity. Some may not know the program exists. However, for many entrepreneurs, the entire IC-DISC process just seems too time consuming and complex, particularly when calculating the program’s commission.
Understanding the Commission Calculation Benefits
Yes, maximizing tax benefits with the IC-DISC designation can be complicated. It’s always best to work with a professional accountant to ensure you’re getting the deepest tax reductions possible. However, knowing some of the IC-DISC’s basic commission calculation components can help you decide if your business should pursue tax relief for export-related revenues. There are generally two simple methods used to determine sales commission:
- 4 percent of total export gross receipts
- 50 percent of combined taxable revenue generated from export sales
Your chosen professional accounting team will typically work through both scenarios to pinpoint the option that offers the biggest potential return as a baseline for your business. However, a skilled and experienced accounting firm will dig deeper to optimize available commission based on several other factors, such as:
Allocation of Costs and Expenses
IC-DISC regulations and tax codes enable the allocation of export costs and expenses with domestic transactions. Additionally, the program allows individual sales transactions to be grouped in various configurations to further drive potential return on investment. Any eligible allocated costs may allow business owners to elevate profit margins per group or single transactions.
Each year, the program allows taxpayers to designate group transactions and annual determinations based on two specific requirements:
- Established trade use or industries
- Identified two-digit group of SIC codes
It’s important to note that establishing group transactions doesn’t limit business owners to product or group transactions for other products.
Identifying Overall Profit Percentage (OPP)
Understanding the overall profit percentage on export revenues can help to further decrease the final tax burden. All profits garnered using any of the calculation strategies above are restricted to the overall profit percentage of an organization. If the business shows a loss during any tax year, the IC-DISC tax benefit cannot be used.
Acena Consulting Can Optimize Your IC-DISC Commissions
Acena Consulting specializes in IC-DISC services that maximize return potential for clients that generate revenues from income. Contact our team today to schedule an initial consultation.