The Interest Charge Domestic International Sales Corporation (IC-DISC) designation can yield considerable tax savings to businesses that qualify as an export company. First launched in 1971, IC-DISC has undergone several changes and updates over the past four and a half decades. However, its basic premise remains the same: an IC-DISC reduces corporate tax liability by converting taxable export income into dividends to lower the overall tax rate. As a "paper corporation," business owners don't need to demonstrate an office space, employees, or tangible assets to wield the power of an IC-DISC; the designated IC-DISC entity only has to establish its own bank account, keep separate accounting records, and file U.S. tax returns to begin tapping into the benefits of the program.
Are You Missing out on IC-DISC Benefits?
Despite the program's longevity and proven cash flow potential, many small business owners and tax professionals still struggle with understanding how to optimize the value of their IC-DISC. Some miss out on substantial savings, while others miss out on the designation completely. Don't let the myths surrounding this vital program deter you from participating. Separate IC-DISC fact from fiction to ensure your business maximizes these essential tax benefits.
Fiction #1: Only Direct Sales Qualify for Exemption
Fact: Not true. Eligible transactions made by privately held U.S. companies qualify when they are delivered outside of the U.S., regardless of whether the company that manufactured the products (or provided the services) transferred the products to a distributor who then sold them outside the U.S. As long as the products in question arrive at their outside-the-U.S. location within one year of the original sale, the transaction qualifies.
Fiction #2: IC-DISC Was Established as an Offshore Strategy
Fact: Nope. The IC-DISC program was initially launched to encourage U.S. companies to broaden their global reach by exporting products and services beyond its borders. An IC-DISC is available to privately held U.S. corporations that qualify for the designation and does not require establishing an offshore presence or moving assets overseas.
Fiction #3: Only Large Companies Benefit From the Designation
Fact: No. The designation works regardless of entity size. At Acena Consulting, we have clients that ship less than $1 million in goods and services outside the U.S. and still generate significant tax savings every year that can be directly applied to future business growth. In fact, in terms of branch reach and market presence, the IC-DISC can prove to be a game-changing force that helps small businesses compete on a global scale.
Fiction #4: IC-DISC Set Up and Administration of an IC-DISC is Hard
Fact: Yes and no. For many business owners, managing the IC-DISC process internally proves challenging and time consuming. The program has several requirements that must be met to both qualify for and maintain IC-DISC status. The best way to establish (and sustain) eligibility is to partner with an experienced team of tax professionals that specialize in the IC-DISC program. A firm with extensive program insight will team with your internal stakeholders to ensure your business meets initial requirements. Additionally, they will also continue to collaborate with relevant internal employees as part of the administration and maintenance process.
Fiction #5: IC-DISCs Are Tax Shelters and Subject To the FBAR Reporting Requirements
Fact: False. As noted above, an IC-DISC is available to U.S. corporations that qualify and elect to participate in the program. An IC-DISC status does not hold or maintain any foreign bank accounts or assets that are housed offshore. The program is an incentive for U.S. taxpayers and is not considered a tax shelter.
Have questions about your qualification as an export company? Acena Consulting can help. Our firm of reputable tax credit professionals partners with executives and CPAs in multiple industries to discern eligibility and maintain program eligibility to maximize the potentially significant benefits of the export credit. Contact us today for a no-risk evaluation of your business operations.