IC DISCs – An Excellent Planning Vehicle for Business Owners with International Operations

The Interest charge  domestic International sales corporation aka IC-DISC is an interesting tax solution that many financial advisors that have business owner clients with international sales are completely unaware of. It has greater personal tax planning utility for the business owner. 

An IC-DISC is a corporation that receives tax exempt status for federal tax purposes if it is engaged in export sales. Of course, there are many hoops to jump through – (1) At least 95 percent of the export sales must qualify as qualified export receipts. (2) At least 95% of the asset must be qualified export assets (3) The IC-DISC must have only one class of stock and at least 2500 of capital. 

The IC-DISC acts as a commission agent for the Principal (parent operating company) in its export sales. The operating business is able to take a tax deduction for this commission payment.  The IC-DISC can capture the greater of 4 percent of qualified export receipts or 50 percent of combined taxable income. The annual limit is $10 million of qualified export receipts. The annual tax cost is a small toll charge equal to to an interest charge on DISC income based on the T-bill rate. Deferred IC-DISC profits can be reinvested through loans known as Producer Loans back into the operating business. Distributions to the business owner receive qualified dividend treatment – 20 percent. Here is the kicker – several tax court cases have ruled favorably on the ownership of IC-DISC shares within a self-directed Roth IRA.

In summary what I am saying is the following – a business owner with export sales can convert the foreign income into income that can be deferred at a minimal tax cost and distributed as a qualified dividend instead of taxation at ordinary rates. The self-directed Roth IRA converts the dividend income which is all of the income from the IC-DISC into tax-free income. How good is that!

Of course, the devil is always in the details. 

About gerrynowotny

I am a tax and estate planning attorney with a JD and LL.M in estate planning from the Univesity of Miami School of Law. I have worked in the life insurance industry for twenty three years and the last eleven in private placement life insurance.
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