If your business exports U.S. made goods, you can get a free tax benefit equal to 10% or more of the profit on sales of those goods. This subsidy is available to manufacturers and distributors using an IC-DISC. It is available to non-public U.S. companies organized as C corporations, S corporations, partnerships, LLCs and sole proprietors.
It’s fairly easy. Your business entity or its owner(s) form a U.S. corporation which makes an election to be treated as a Domestic International Sales Corporation (DISC, often called an IC-DISC). The DISC and the business agree in writing that the business entity will pay the DISC a commission on export sales for doing nothing. The DISC has no employees or assets. The business entity gets a full deduction for the commission. The DISC is tax exempt on qualifying commission income. It then pays a dividend to the shareholder(s). The ultimate individual shareholders pay tax at capital gains rates on this qualifying dividend. This provides a Federal rate differential of 20%.
DISC commission is the greater of 4% of qualifying sales or 50% of net taxable income from qualifying sales. Qualifying sales includes profitable sales for use outside the U.S. of goods made in the U.S. The goods can be made by anyone, either the business with the DISC or someone else. However, the non-U.S. content is less than 50% of the total sales price and the last part of the manufacturing is done in the U.S.
DISC commissions can be improved significantly using various techniques allowed under IRS rules, often nearly doubling the tax savings. These techniques increase the cost of making the calculation, but can greatly increase the tax benefit.
DISC is NOT cutting edge, aggressive, or risky. It works. The Bush administration tried to get it repealed, but Congress said they wanted to keep it. There’s no current repeal proposal being given serious consideration. The Obama administration has proposed keeping DISC and the rate differential. How long will DISC benefits last? Who knows. But it’s here now.
Getting the agreements and calculations done in a manner that optimizes benefits requires experience. The DISC must also file a tax return each year, and Form 1120-IC-DISC is quite different than a regular corporate return.
If you’re an exporter of U.S. made goods, DISC can probably help you, but you need help to set up a DISC. A new corporation is needed, since the DISC election must be made at the start of a year. Also, the DISC and the business entity must have the appropriate agreements in place, and the DISC should have an “evergreen” dividend resolution. To get the benefit, the DISC must exist and the election must be effective BEFORE the goods are sold.
For more information, see http://www.sfoxcpa.com/Export-Tax-Subsidies.php or e-mail me at email@example.com
Steve Fox, CPA