The Benefits of IC-DISC and Producer’s Loans
IC-DISC, which stands for Interest-Charge Domestic International Sales Corporation is an export tax benefit for small and medium U.S. manufacturers. Due to the amount of money the incentive can save a company, it is alarming how few businesses are taking advantage of the IC-DISC laws.
According to U.S. tax laws, a company can utilize an IC-DISC to have its export income tax liability reduced by more than 50%. Instead of being taxed the standard income tax rates (highest being 35%), IC-DISCs’ profits are being taxed at the dividend rate of 15%.
Bottom line, the IC-DISC is allowing companies to double their post-tax income. Sounds pretty good, right?
That being said, here is a generalized description of three different types of businesses that can qualify for IC-DISC:
- A manufacturing company that directly exports its own goods overseas.
- A company that provides engineering or architectural services that are administered in the U.S. for a structure built outside the U.S.
- A company produces a component part that is included in a product that is exported overseas.
A domestic corporation must file an election with the IRS to be treated as an IC-DISC for tax purposes. The corporation must maintain a minimum capitalization of $2,500 of authorized and issued shares and meet the qualifying export receipts test and export assets test, which state that at least 95% of the IC-DISC’s gross receipts and assets must be related to the export of U.S . manufactured property whose value is at least 50% attributable to the U.S. produced content.
Here is a quick 3- Step Guide to the IC-DISC:
- Why an IC-DISC? Since the IS-DISC is a tax-exempt corporation, it earns income that would otherwise be taxable to the exporter. The IC-DISC itself will not be taxed on the income, but once the income is distributed to the shareholders it will be taxed at dividend income tax rates, which are significantly less than ordinary income tax rates. The difference between dividend tax rates and ordinary tax rates is extreme enough to create tax savings.
- Who Qualifies? If you are able to answer “yes” to all of the following questions, you may qualify for an IC-DISC.
- Does your company export (directly or indirectly) more than $3 million annually?
- Is your manufacturing done within the United States?
- Are you a privately-held company?
- Is It Worth It? To find out whether it is financially compelling for your business, estimate your savings using the table below.
|Export Sales||Est. Minimum Tax Savings||Est. Maximum Tax Savings|
Another aspect of the IRC worth mentioning when talking about IC-DISC’s is a Producer’s Loan, a loan paid to a U.S. manufacturing company, usually the operating entity paying sales commissions to the DISC.
According to IRC Section 993 (d), for a loan to qualify as a Producer’s Loan, it must meet the following requirements:
- the loan, when added to all other producer’s loans made by the DISC, does not exceed the DISC income at the start of the month in which the loan is made;
- the loan is documented by a written note with a maturity date of no more than five years;
- Must be made to a person engaged in U.S. manufacturing, production, growing, or extraction or export property;
- the loan must be designated as a producer’s loan at the time it is written.
If it is in the company’s best interest to use a Producer’s Loan, it would accelerate the deduction for the operating entity and put off payment of any taxes on dividends appropriated to a later time. It would not affect the 95% Asset Test of the DISC since it is considered an export asset under the IRC, but the proper documentation and evidence of the loan must be readily available.