IC-DISC BASICS
Learn more about whether you are eligible for the IC-DISC to save you money! For most companies, the steps are as seamless as laid out below when working with our exclusively IC-DISC focused specialists.

What Is It?
The Interest Charge Domestic International Sales Corporation (“IC-DISC”) federal tax incentive was provided by Congress to aid businesses that sell, license or lease goods for use outside the United States. The items need to be at least partially made, produced, grown or extracted domestically. Certain services also qualify. The IC-DISC has historically had bipartisan support and is the last in a long line of export incentives. Prior incentives have been challenged by our trade partners and subsequently phased out by Congress. However, the IC-DISC remains unchallenged by the EU and other trade partners. The IC-DISC reduces the effective federal tax rate on a large portion (at least half) of qualified income taxed at the top ordinary rate (29.6% to 40.8%) down to 23.8%. This is an immediate and permanent tax savings. Use of the IC-DISC is recommended by the U.S. Department of Commerce.


How Does It Work?
(click each box for more detail)

An IC-DISC is a separate tax-free entity which is established in a domestic jurisdiction of choice. Directly or indirectly, the IC-DISC is typically owned by the same shareholders as the related operating company. Most commonly, the entity is a subsidiary of the related operating company if it is a "pass-through" entity (partnership or S-Corporation). See Diagram A.
The commission is computed based on rules outlined by statute and related regulations. While these rules are complex, the basic methods of calculating the commission are:
1) 50% of the operating company’s net income from IC-DISC eligible sales.
OR
2) 4% of the operating company’s IC-DISC eligible sales amount (limited to taxable income from eligible sales)
Many additional methods are allowed and encouraged by statute, and can far exceed these basic commission calculation options, particularly when a detailed, transaction by transaction (“T x T”) commission calculation is performed. IC-DISCs may perform other sales activities, but this use as a "commission DISC" is by far the most common. No business operations of the related operating company are affected in any manner and customers are not aware of the IC-DISC. It literally receives a commission based on its IC-DISC entity classification.
By statute, the IC-DISC is designed to receive a deductible commission from a related operating company with qualified sales. The commission is fully deductible to the related operating company, and is tax-free income to the IC-DISC.
Even if the IC-DISC itself has no employees, operations, or responsibilities, it is explicitly allowed and intended to receive this tax-free commission income simply for having properly electing IC-DISC status.
Upon receiving cash, the IC-DISC then usually pays the funds as a dividend to its owners, which is ultimately taxed at qualified dividend rates (top rate 23.8%) at the individual level. Thus, in the case of a pass-through operating company (S-Corp, Partnership, etc.) which owns 100% of the IC-DISC (the most common, and usually most sensible, IC-DISC structure and usage for a pass-through entity) an immediate and permanent tax arbitrage is recognized on the amount paid in STEP 3 (see Diagram A). The cash need not stay in the IC-DISC for any length of time. Funds are typically returned as part of the same bank transaction on the very same day. This “transfer in and out” exchange of commission expense for dividend income ensures there is no cash flow impact.
The IC-DISC may easily defer payment of the dividend for one year. IC-DISCs may also loan commission income back to the operating company for even longer-term deferral (additional limitations, compliance, and interest charges may apply).
The reduced taxes are enjoyed by the ultimate, individual owners of the pass-through entity in the structure illustrated in STEP 4 above. Instead of being taxed at ordinary rates (top rate 29.6-40.8%) the owners are taxed at the dividend rate (top rate 23.8%) on the full amount of commission when it is returned as a dividend immediately. Thus, it is important that the owners be subject to ordinary individual income tax rates in order to achieve the “arbitrage” savings resulting from essentially substituting ordinary individual rates for dividend rates (see next section “Who Can Benefit” for discussion of typical privately held C-Corporation structure.)
Who Can Benefit?
Manufacturers, recyclers, distributors, software companies, farmers, engineers, architects, food processers, brokers, and others can enjoy tax savings if they are making qualified sales. For pass-through companies this is usually done using the structure illustrated above. However, an IC-DISC may be owned directly by shareholders that own or control the related operating company (whether a C-Corporation, partnership, or S-Corp). Most often however, the IC-DISC is owned in this “brother-sister” manner (see Diagram B) because it is the only way to achieve tax savings for a closely held C-Corporation. Passthrough entities also may use this structure for succession and compensation purposes. Use of an IC-DISC with a privately held C-Corporation will eliminate double taxation on the amount of the commission. This is typically the most tax advantageous method for owners to take earnings out of a C-Corporation.
Foreign public companies and individual foreign owners have claimed permanent tax benefits using more aggressive structures. (see below) Domestic public company use of the IC-DISC is rare as no permanent tax savings are realized. Benefits are limited to deferral for such entities.