IC-DISC Frequently Asked Questions

  1. What is a Domestic International Sales Corporation (DISC)?Interest-Charge Domestic International Sales Corporations (DISC’s) are domestic corporations formed to assist with the export of U.S. products. To be a DISC, a corporation must be organized under the laws of a state or the District of Columbia. Parent shareholders—generally, other corporations, individuals, partnerships, trusts, or estates—form a corporation that elects to be recognized as a DISC by filing Form 4876-A.  This election is considered to be in effect as long as the DISC meets the following requirements:  (1) at least 95 percent of the DISC’s total receipts are “qualified export receipts;” and (2) at least 95 percent of the adjusted basis of the DISC’s total assets are “qualified assets.”  A DISC is also required to have only one class of stock with stated value of at least 2,500, conform its tax year to that of the principal shareholder(s), and maintain separate books and records.
  2. What was of the purpose of the legislation creating DISCs ?Originally adopted in 1971, the DISC regime was intended to induce an increase in export activities for U.S. companies. The DISC was established to encourage U.S. manufacturing by providing a federal income tax incentive, in the form of lower federal taxes on export profits, for companies that export goods manufactured in the United States.
  3. How much does it cost to set up a DISC?A DISC can be established for as little as $5,000.  The cost will vary based upon complexity.  The minimum capital requirement is $2,500.
  4. Must you really have a DISC in order to receive the federal income tax incentive for exporting products?Yes.  Federal income tax incentives are not permitted until after the DISC has been formed, and the benefits only relate to the “post-DISC” sales activity.
  5. What products qualify as Export Property?Qualified export property is inventory and property held for sale or lease which:  (1) had been made manufactured, produced, grown, or extracted in the United States by a “person” other than a DISC; (2) was held primarily for sale or lease in the ordinary course of business for direct use, consumption, or disposition outside the United States.
  6. Must the product be 100% manufactured in the United States?No.  To be considered Export Property at the time of sale or lease by the DISC, not more than 50 percent of its fair market value can be attributable to imported articles.
  7. Must the products be directly exported?No.  Products (including parts) sold to another entity and ultimately exported may qualify so long as they are exported within a year of sale and not subsequently transformed into another product while inside the United States.
  8. Can parts qualify?Yes, provided they meet the other requirements (qualified Export Property, etc.).
  9. How long will the federal income tax incentives continue?DISCs were created by Congress in the 1970s.  DISCs are primarily utilized today as a vehicle to convert ordinary income into dividend income.  DISC shareholders realize a tax benefit due to the tax rate differential between dividends and ordinary income.Effective for tax years beginning after December 31, 2012, Congress enacted the American Taxpayer Relief Act of 2012 which modified the top marginal income tax rate to 39.6% for individuals with taxable income over $400,000 (single) or $450,000 (married filing jointly).    Additionally for these same income thresholds, the legislation permanently enacted a maximum 20% dividend tax rate which applies to individuals in the top marginal tax bracket (a 15% or 0% rate still applies to individuals in lower tax brackets).

    A new 3.8% Medicare tax on net investment income applies to individuals with modified adjusted gross income in excess of $200,000 (single) or $250,000 (married filing jointly).  Investment income includes items such as dividends, interest, annuities, royalties, etc.  DISC dividends would be subject to this additional tax if the individual meets the income threshold.

    With the new legislation, the tax rate differential between dividends and ordinary income becomes 15.8% (39.6% – 23.8%) for individuals in the top marginal tax bracket.

  10. How can I tell if the associated federal income tax benefits will be greater than the associated costs?A simple Cost/Benefit analysis is required.  First, talk with Profit Point Tax Technology (PPTT) or your preferred service provider to determine the cost to establish the DISC (which can be as low as $5,000).  Next, ask for the annual cost to perform the DISC computation (which will be based upon the amount of your export sales or number of export transactions per year).  Finally, PPTT would be able to use 2011 data in order to estimate what your tax savings may be for 2012 and 2013.  We provide this estimate at no cost or obligation.
  11. How much do some of your smaller exporters save in federal income taxes because they utilize a DISC?As we all know, every company is different.  That said, one PPTT client exports approximately $3 million annually, and saves more than $200,000 in federal income taxes per year by calculating the DISC benefit on a transactional basis.  The tax benefit is not based solely upon sales.  Other factors, such as export profitability, domestic profitability, and associated expenses, are also relevant.
  12. Are DISCs difficult to maintain annually?No, however, there are annual requirements that must be met.
  13. What are some of the annual qualification requirements of the DISC?A DISC must derive at least 95% of its gross receipts from qualified export receipts in any given year.  At least 95% of IC-DISC assets at the close of its taxable year must be qualified export assets.  Also, a DISC is required to maintain its own books and records.  Although not statutorily required by U.S. tax law, it is also recommended that a DISC establish a separate bank account to provide a vehicle through which DISC commissions and dividends can be paid and easily tracked.
  14. Approximately what amount of exports is necessary for a DISC to be worthwhile?There is no minimum export sales amount.  PPTT has clients that export as little as $300,000 per year.  What is important is the Cost/Benefit Analysis discussed in Question 10.  If you manufacture in the United States and sell outside the United States, it is likely that you qualify for the federal income tax incentive.
  15. Who should I talk to about setting up a DISC?You should talk to PPTT or your current service provider or attorney.  However, if you are not offered enough information to do a substantive Cost/Benefit Analysis, please talk to us.  We are happy to work with your service provider to ensure that you are fully utilizing this federal income tax incentive.
  16. Are the benefits associated with a DISC “fixed” (in amount), or would different service providers calculate a different tax benefit based upon their experience and software?The benefits can vary tremendously from one service provider to another.  Many accounting firms use a spreadsheet to perform these calculations.  Some accounting firms do not perform the calculations at all.  As it is necessary for many of the regional and local accounting firms to be generalists, they are often unable to develop the appropriate software and expertise in this specific area of the tax law.  This is understandable.  However, you should not pay more in federal income taxes than required simply because an accounting firm may be unable to specialize in export tax incentives.  Whether the tax benefit for exporting products is $1,000 or $1,000,000 per year, it belongs to you.  You have already done the hard part – manufactured and sold the products.  Shouldn’t your income tax calculations properly reflect the appropriate and optimal tax benefits?
  17. What is a “transactional calculation” and why does it provide a greater federal income tax benefit?The DISC legislation assumes that the DISC benefit will be calculated separately on every export transaction.  As the legislation provides 13 different ways to calculate the benefit for each transaction (remember – this is an incentive!), a transactional calculation provides the greatest tax benefit.  In general, the tax benefit associated with a transactional calculation is 2 to 3 times greater than a “company-wide” computation.
  18. Does the DISC have to purchase the goods and res
    ell them?
    No, the overwhelming majority of the DISCs are commission DISCs – where the DISC acts as a commissioned selling agent on behalf of its related supplier(s).  However, the DISC can be operated as a buy-sell DISC.  A buy-sell IC-DISC purchases export property directly from its related supplier(s) and subsequently resells the merchandise.
  19. Do my invoices have to change and will my customers see a difference if a DISC is used?The IC-DISC is not required to provide any services in connection with the sale of its goods, or even handle the billings of its sales.
  20. Does a DISC have to have any employees?Although it is a separate entity, the IC-DISC is not required to retain any employees, maintain inventory, or make its own sales.   As a domestic corporation, the IC-DISC is required to prepare financial statements on an annual basis.
  21. Are there any federal income tax benefits associated with the manufacturing of products in the United States, even if these products are not exported?Yes.  In 2004, Domestic Production Activities deduction (DPAD) legislation took effect.  Like the DISC, the benefit is associated with goods manufactured in the US.  However, to take advantage of this benefit, it is no longer required that the goods be exported.  In 2010, the deduction increased to 9% of the qualified income.  It is also important to note that a DISC transaction can also qualify for the DPAD benefit – so a company can legally claim both (DISC and DPAD) for the same qualifying transactions!