An Interest Charge Domestic International Sales Corporation (IC-DISC) is a federal export tax incentive authorized by Section 992 of the Internal Revenue Code. IC-DISC status allows U.S. exporters to defer tax on a portion of export income and treat distributions as qualified dividends, which are typically taxed at lower rates.
A domestic corporation that has elected to be treated as an IC-DISC must meet qualification requirements under U.S. tax law. Once approved, the entity itself is not taxed on its income. Instead, its shareholders are taxed when the income is actually or deemed distributed, or when other taxable events occur. Shareholders must also pay an annual interest charge on their share of deferred tax liability.
The IC-DISC structure operates largely as a “paper” entity. The exporting company forms a separate C corporation, pays it a commission on qualifying export sales, and deducts that commission as a business expense. The IC-DISC receives the commission income tax-free, and when those earnings are distributed to shareholders, they are taxed as qualified dividends. This tax deferral applies to income attributable to up to $10 million of qualified export receipts each year. With the Qualified Business Income (QBI) deduction set to expire in 2025, qualifying as an IC-Disc could be even more beneficial for U.S. exporters.
Qualification Requirements
To qualify as an IC-DISC, a corporation must be organized under the laws of a U.S. state or the District of Columbia and meet specific statutory tests:
- 95% Gross Receipts Test: At least 95% of the corporation’s gross receipts during the tax year must be qualified export receipts, such as income from the sale, lease, or exchange of export property for foreign use.
- 95% Qualified Export Assets Test: At the end of the tax year, at least 95% of the adjusted basis of the corporation’s assets must consist of qualified export assets, including export property, trade receivables, and working capital related to export activities.
- Stock Requirements: The corporation must have only one class of stock, with a par or stated value of at least $2,500 throughout the tax year.
- Books and Records: It must maintain its own bank account and separate books and records.
- Tax Year Alignment: The IC-DISC’s tax year must align with that of its principal shareholder with the greatest voting power.
- Election: A timely and valid election to be treated as an IC-DISC must be in effect.
If an IC-DISC falls short of the gross receipts or asset tests, it can maintain its status by making a deficiency distribution to shareholders after year-end. This distribution must match the amount of non-qualified receipts or assets and be clearly designated as meeting qualification requirements. If payment is late, interest charges may be applied.
Commission Structure and Payments
Exporters pay commissions to their IC-DISCs based on the value of their export sales. The IRS allows two primary methods for calculating the maximum commission:
- 4% of qualified export gross receipts
- 50% of the combined taxable income from export sales
Businesses must use whichever method yields the higher commission, and additional IRS-approved methods may apply to specific products or pricing strategies.
The commission must be paid within 60 days after the operating company’s tax year ends. Missing this deadline can cause the IC-DISC to fail the qualified export assets test, resulting in the loss of tax benefits. Payment may be made in cash, property, a qualifying written obligation, or an approved accounting entry that offsets a receivable against an existing debt.
IC-DISC enables exporters to lower current tax, defer income, and convert part of export profit into qualified dividends taxed at lower rates. With the QBI deduction set to expire in 2025, this election may become even more valuable. Contact your Stephano Slack tax manager/partner at 610-687-1600 or taxinfo@StephanoSlack.com to see if you qualify as an IC-DISC.
Author Robert Radzinski, CPA, Manager, manages tax compliance for businesses and high-net-worth individuals. Rob can be contacted at 610-687-1600 or rradzinski@stephanoslack.com.
Disclaimer: This content is for informational purposes only and doesn’t constitute professional advice.
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