Many companies utilizing the IC-DISC structure, a federal tax incentive to encourage export sales, continue to realize permanent tax savings. The strategy allows companies to convert a portion of their export sales profit from ordinary income, which is taxed at a maximum income tax rate of 39.6%, to qualified dividends, which are often taxed at a much lower rate.

In general, exporters of U.S. manufactured goods can calculate and deduct a commission amount paid to an IC-DISC company. When paid back to the shareholders, the commission amount is converted to qualified dividend income. The commission amount can be the higher of the following:

• 4% of qualified gross export sales (limited to taxable income from those sales), or
• 50% of the taxable income from qualified export sales.

The IRS also allows taxpayers to use more detailed methods that focus on evaluating export sales more thoroughly. For example, if more than one type of product is sold overseas, grouping the total export product sales into different categories can allow the highest commission calculation to apply to each category, which may result in a higher total commission than when calculated by the total exports overall. In addition, if the profit margin on export sales is less than the profit margin on worldwide sales of the same products, the commission can often be increased even further. Close analysis can identify the best method for maximizing the commission amount.

Since recent tax legislation removed any scheduled expiration of IC-DISC benefits, it’s worth reviewing your IC-DISC structures to ensure you are maximizing the tax benefits for your company.

Contact Ray Polantz at rpolantz@cohencpa.com for more information.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.