16 August 2012
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Less-Known Benefits of the IC-DISC

An export company’s IC-DISC is not obliged to perform any service at all. However, if the company lets it do so, it could enhance the tax benefits it provides. Such services could include the promotion of the export company’s activities, or simply purchasing the said company’s receivables at a discounted rate. The latter is known as factoring. The income garnered from these services is also amenable to distribution to the company shareholders as a qualified tax on dividend rate, similar to commissions.

The IC-DISC can also be used as a tool for estate planning or as an incentive to employees. The shareholders of an IC-DISC may be different from the company’s shareholders, and these shareholders may not have the same proportionate shares in the IC-DISC. However, caution must be taken in case the existing IC-DISC’s shares are transferred due to the valuation issues that must obviously be considered.

Lastly, taxes on commissions can be deferred if these are related to ten million dollars worth of export sales in a year left within the IC-DISC, if modest yearly interest payments are made to the Internal Revenue Service. The interest charges involved (“interest charges” being the “IC” in IC-DISC) lower since they are tied to rates of Treasury bills, which run at a mere fraction of one percent.

Export companies, however, must act fast. The export tax benefits to be incurred from IC-DISCs are not retroactive. So far, this 15% qualified dividend tax rate is only valid till the end of this year. Therefore, the sooner the IC-DISC is set up, the higher the tax benefit the company can enjoy. After 2012, dividends will once more be taxed as regular income.

Congress may or may not extend this dividend rate into the coming year. Either way, IC-DISCs are still a good way of promoting growth in business by shifting the company’s income into a lower tax bracket and deferring taxes on the sales of their exports.

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