A working example of a IC DISC tax savings.

Scenario:

ABC Manufacturing is a U.S. company that manufactures high-quality industrial equipment. ABC’s annual revenue from exporting these goods abroad is $10 million. They decide to establish an IC-DISC to take advantage of U.S. tax incentives for exporters.

ABC Manufacturing is the parent company.

ABC-ICD is the newly formed IC-DISC.

Step 1: Setting Up the IC-DISC

ABC Manufacturing sets up the IC-DISC, which is a C Corporation. The IC-DISC is a separate entity  The IC-DISC then earns a “commission” on the operating company’s export sales based on the greater of

50% of net income on sales of qualified export property or 4% of gross receipts from sales of qualified export property or in some cases an arm’s length transfer pricing is used.

Step 2: Income Transfer to IC-DISC

Let’s assume ABC Manufacturing sells the goods for $10 million and enjoys a profit on these export sales of $2 million , and this is where the tax advantages will come into play.

Step 3: How the IC-DISC Generates Tax Savings

IC-DISC benefits come primarily from how its income is taxed compared to regular corporate income.

Without an IC-DISC:

If ABC Manufacturing did not use an IC-DISC and simply kept the income from export sales, it would be subject to corporate tax rates (the C Corporation tax rate).The current corporate tax rate is 21%.

With an IC-DISC:

The IC-DISC is a pass-through entity for tax purposes, so it doesn’t directly pay corporate tax. Instead, the commision ($1 million) is distributed to ABC Manufacturing as qualified dividends, which are taxed at a lower rate. These dividends benefit from the 65% dividend exclusion for a C Corporation parent. So in essence the tax rate is 35% of 21% on the return dividend or a 13.65% savings.