What is an IC-DISC and Other Frequently Asked Questions.

Who qualifies to benefit from an IC-DISC?

An IC-DISC is available to U.S. taxpayers with qualifying exports. This includes individuals, C Corporations, S Corporations, partnerships, and LLCs who manufacture, grow, distribute, and/or develop goods and products within the U.S. and who sell to foreign customers directly or indirectly by selling to U.S. or foreign distributers or wholesalers.

Can a foreign shareholder benefit from an IC-DISC?

Yes. Foreign shareholders are taxed on IC-DISC dividends just the same as U.S. shareholders. In certain circumstances, a tax treaty may exempt a foreign shareholder from U.S. tax.

What are the operating requirements of an IC-DISC?

An IC-DISC is required to maintain a separate set of books, have a single class of shares with a par or stated value of $2,500, not be in a controlled group with a FSC, make a valid election to be treated as an IC-DISC and file U.S. tax returns. There are no other required changes to business operations.

Is an IC-DISC expensive to set up?

No. An IC-DISC is relatively inexpensive to set-up and maintain.

Is there a limit to the number of IC-DISCs an exporter can have?

No. There is no limit on the number IC-DISCs an exporter can have.

Is there a limit on the number shareholders that can own an IC-DISC?

No. An IC-DISC can have any number of shareholders; however, each shareholder must consent to the IC-DISC election.

How is an IC-DISC commission computed?

By statute, an IC-DISC commission is generally the greater of 4% of sales, limited by net taxable income, or 50% of net taxable income, whichever is greater. There is a great deal of flexibility available in computing the IC-DISC commission as it can be computed on a very broad or a very detailed basis.

What is the transaction by transaction (TxT) commission computation?

The TxT IC-DISC commission computation is a detailed commission computation that examines the profitability of each transaction as well as the various products sold by the exporter and computes the optimal IC-DISC commission.

Tax, Dividends, FDII, IRS, and Form 8404

Do IC-DISCs pay taxes?

No. An IC-DISC isn’t taxable at the entity level. An IC-DISC is categorized as a domestic C corporation that’s tax exempt for federal income tax purposes.

Can income be deferred in an IC-DISC?

Yes. Income transferred to a tax-exempt IC-DISC can be deferred from taxation to the IC-DISC shareholder as long as the IC-DISC remains qualified under the IC-DISC rules.

How are IC-DISC dividends taxed?

IC-DISC dividends are taxed to individuals and trusts as qualified dividend income. IC-DISC dividends are fully taxed to C corporations.

How does the foreign-derived intangible income (FDII) deduction apply to an IC-DISC?

A C corporation exporter may benefit from both the FDII deduction and the IC-DISC, however, the income eligible for the FDII deduction may be reduced by any commission paid to the IC-DISC on FDII eligible sales.

When is an IC-DISC tax return due with the IRS?

The Form-1120-IC-DISC is due 8.5 months after the end of the year and there are no extensions.

What is the IC-DISC 60-Day rule?

The 60-day rule requires that the exporter pay a reasonable estimate of the IC-DISC commission to the IC-DISC within 60 days of year end. The safe harbor reasonable estimate is at leat 50% of the final IC-DISC commission. It is advisable to pay well in excess of 50% to maintain flexibility.

What is the IC-DISC 90-Day rule?

The 90-day rule requires that the exporter pay any remaining unpaid IC-DISC commission after the 60-day rule payment be paid to the IC-DISC within 90 days of the final IC-DISC determination or redetermination which is generally the filing of the IC-DISC tax return. The 90-day rule also provides that any excess commission that was paid to the IC-DISC be paid back to the exporter within this 90-day timeframe.