In my previous article, How to Start a Global Sales Strategy for Your Exports , I discussed some significant incentives and resources Maryland offers manufacturers that are considering an export initiative. This second article of the three part series will look at tax structures for exporters and the incredible tax savings these structures provide.
Interest Charged Domestic International Sales Corporation (IC-DISC) is a unique and desirable corporate structure for US Manufacturers who are exporting to foreign countries. An IC-DISC is a corporation that is exempt from income tax, alternative minimum tax, and accumulated earnings tax. Through making an election to form an IC-DISC, companies can reduce their tax rate on exports by 19.6 percent, which is a huge permanent tax savings! A majority of you are thinking, this sounds too good to be true. Well let me tell you how it works.
As an incentive to increase exportation of US manufactured goods, qualifying export companies can setup a separate corporation that makes an election to be an IC-DISC. The export company pays the IC-DISC a commission equal to the greater of 50 percent of its export net income or 4 percent of its export gross receipts. Under this structure, the IC-DISC does not have to have an office, perform services, or assist with sales to earn that commission. The export company receives a deduction for the commission expense, which reduces ordinary income (43.4% tax rate including NIIT), and the IC-DISC distributes its commission revenue as dividends to the shareholders. Those dividends are taxed at dividend rates (23.8% including NIIT), assuming the shareholders are individuals or flow-through entitles (Partnership, LLC, S-Corporation). Below is a diagram of how these structures are designed for these commission payments.
An export manufacturer should consider this type of structuring, however, the government did put some stipulations on how to maintain IC-DISC status:
- At least 95% of its gross receipts during the tax year are qualified export receipts.
- Qualified export assets are at least 95% of the sum of the adjusted basis of all its assets.
- Only one class of stock.
- Maintains separate books from the export manufacturer.
The above qualifications are not all encompassing and should not deter you from speaking with your tax advisor about how strategic structuring can help your export company. The regulations are complex but can save your company and shareholders a significant amount of money every year when it comes tax time.
MKS&H specializes in helping manufacturers determine activities that qualify for the IC-DISC structure and ensure those companies stay in compliance every year. Our tax department works closely with your company to implement systems and processes to track qualifying exports through the supply chain and ensure the maximum commission payment to the IC-DISC, resulting in full recognition of tax savings.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.