Domestic International Sales Corporation

What Every Manufacturer Should Know A DISC Can Save You Dollars

With a maximum 20% dividend rate being permanently enacted for certain high income individuals, all companies that manufacture products in the United States, and these products are used or consumed overseas, should consider the DISC as a way to reduce their federal income taxes.

Domestic International Sales Corporation (DISC)

The DISC was the primary vehicle used by the federal government to encourage U.S. manufacturing from 1971 to 1984. In 1984, a new incentive was created (the Foreign Sales Corporation [FSC]) to replace the DISC. The DISC has been rarely used over the last 25 years, because for most companies the now repealed FSC or ETI legislation provided a larger tax benefit. It’s likely that your service provider is unaware of or has little knowledge of the DISC.

In 2003, the DISC regained prominence when the dividend rate was reduced to 15%. Because the DISC benefits flow to the shareholders as a dividend, the associated effective tax rate was reduced from 35% (the corporate tax rate) to 15%.

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) 1. 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.

For flow-through entities, the strategy converts ordinary income into qualified dividend income for the exporting entity’s shareholders.

For privately owned C-Corporations, a DISC converts non-deductible dividends into a deductible DISC commission.

To qualify for this benefit, the company’s export property must be manufactured in the U.S. and contain less than 50% imported materials.

Flow-Through Example

Export Sales $750,000
COGS   300,000
Expenses     75,000
Combined Taxable Income (CTI)   375,000
DISC Commission (50% of CTI)   187,500
  • S-Corp pays IC-DISC commission of $187,500
  • DISC pays $187,500 dividend to S-Corp (really the commission)
  • The $187,500 dividend flows through to the shareholders at the 23.8% tax rate (20% dividend tax rate + 3.8% Medicare tax rate)
  • Tax savings:  (39.6%-23.8%)  x  $187,500 = $29,625 per year

If you have any questions or would like to schedule an appointment to further discuss this opportunity, please contact Patrick Sweet at patrick@profitpointtax.com.

Six Common Misconceptions about the DISC

DISC Frequently Asked Questions