U.S. taxpayers can get an export subsidy from the government
for exporting U.S. made goods. This
applies for manufacturers and resellers. The subsidy is available through a Domestic International Sales
Corporation, the DISC export tax incentive. This provision, first enacted in 1971, was
little used from 1984 to 2004 because other subsidies were better (and mutually
exclusive) for most taxpayers. The
reduction in the individual tax rate on qualified dividends rejuvenated this tax
benefit. DISC is often referred to by the IRS form designation: IC-DISC.
How DISC Works
Exporters of goods made in the U.S. may set up a DISC
owned by either the flow-through entity (S corporation, partnership, or LLC)
doing the exporting or by the shareholders of a C corporation. The exporter (related supplier) pays the IC-DISC
a commission for doing nothing. IRS
regulations contain formulas and rules for determining the amount of the
commission. The IC-DISC pays no
tax. It then pays a dividend each year
equal to its commission. That dividend
qualifies for the reduced tax rate on dividends (currently 15% or 20%, depending on regular tax bracket). The related supplier takes a deduction for
the commission (potentially at 35% or 39.6%).
IC-DISC commission is the higher of 4% of export sales or
50% of net profits on exports. Special
rules in the regulations can significantly improve results where there is
variability in gross margins.
Additional Tax on New Investment Income
Beginning
2013, an additional 3.8% tax applies to net investment income if the
taxpayer's adjusted gross income exceeds certain thresholds. DISC
dividends are qualified dividends and investment income. Thus, a tax rate of up to 23.8% applies to the dividend.
What's the Risk?
IC-DISC has almost no risk.It is not cutting edge, not a tax shelter, not aggressive.If a taxpayer follows the regulations in
making calculations, and if the goods meet the maximum 50% foreign content
requirement, then there is no adjustment for the IRS to make.
How Long Will It Last?
The Bush administration asked Congress to change the law to
prevent IC-DISC dividends from qualifying for the 15% rate. Congress said no, it stays.The Obama administration has not even proposed
any change that would get rid of IC-DISC, and Congress does not seem to want to
get rid of it. The dividend tax was increased effective 2013 to 20% for taxpayers in the top (39.6%) tax bracket, and made permanent. IsDISC here forever? Are you. Who knows. Enjoy the present and hope for the future.
What Does It Cost?
Set up cost for a IC-DISC is $4,000.That includes a new corporation and
appropriate documentation.Then the IC-DISC
must file a tax return each year.If the
calculations are simple, the tax return costs about $2,000.In many cases, it is worth making more
complex calculations, which cost more but reduce taxes by much more than the increased fees.
Steve Fox can help you start saving taxes with the IC-DISC export tax incentive. Call today for help setting up a DISC or help with DISC calculations and tax returns.
