If your company earns significant income from exporting U.S. goods, then you should consider forming an Interest-Charge Domestic International Sales Corporation (IC-DISC). Lei Jiang Law Firm can help you prepare everything necessary to create this corporation. With our guidance, an IC-DISC can be a relatively inexpensive to set up and operate. Its greatest advantage lies in its tax advantages. It can reduce your federal tax rate on a portion of net export income by up to 20%. As a globally-focused law firm, we have significant expertise working with exporter companies, and will work hard to help you get the tax savings your company deserves. Leverage our experience to your benefit, and consider setting up an IC-DISC today!
How does it work?
A domestic C corporation must request and receive IRS approval to be treated as an IC-DISC for federal tax purposes. Moreover, it must maintain its own bank account, keep separate books and records, and file US tax returns. However, the DISC needs not have an office, employees, or tangible assets, nor is it required to perform any invoicing or provide services. In essence, the DISC is a paper entity and is transparent to existing customers.
The DISC can receive commission payments from the U.S. exporter/manufacturer. The commission payment to the DISC is fully deductible for the exporter/manufacturer. The DISC pays no federal income taxes. It pays dividends to its shareholders. The dividends are taxed at the shareholder level at 15%. Through this methodology, the DISC effectively converts 35% ordinary income to 15% dividend income.
Moreover, shareholders may defer up to $10,000,000 of annual income in the DISC. If the DISC defers its income, there is an interest charge – hence the term “Interest-Charge DISC” – on the deferred tax liability at U.S. Treasury bill rate. This interest charge is not assessed to the DISC, but to the shareholders.
How to qualify?
To qualify to become an IC-DISC, the U.S. exporter must be incorporated in at least one of the 50 states or the District of Columbia, have U.S. export property, produced or manufactured in the U.S., with 50% U.S. content that is sold primarily to outside U.S. customers. There are requirements for setting up a DISC. For example, DISC must be a C Corporation organized under the laws of a state, with only one class of stock, has a par value of at least $2,500, must meet export gross-receipts test and export-assets test, etc.
The DISC can be set up in two ways: 1) as a direct subsidiary of a U.S. Corporation (exporter/manufacturer), or 2) as a company owned by the same shareholders of a closely-held U.S. C Corporation.
Lei Jiang Law Firm has helped many Ohio clients in their import/export business. Our law firm has also advised our clients on related tax issues. If you want to form an IC-DISC, set up a system to comply with IRS requirements, or have other import/export issues, please contact us. We provide quality legal service in a cost effective way.