The Six Common Misconceptions about the DISC

  1. “If a DISC would benefit our company, our accountant/lawyer would have told us about it.”
    The DISC legislation was enacted in 1971 to encourage the exportation of US manufactured goods.  In 1984, the DISC legislation was replaced by the Foreign Sales Corporation (FSC) legislation, but the DISC legislation remained in place.  The DISC was rarely used between 1984 and 2003 (as it was primarily a deferral mechanism) and many service providers are unaware it still exists.  However, in 2003, when the dividend rate was reduced to 15%, the DISC became much more valuable.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.
  2. “It costs too much to set up and maintain 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.
  3. “Our company does not export enough for it to be worthwhile.” 
    There is no minimum export sales amount.  We have clients that export as little as $300,000 per year.  As you know, every company is different.  That said, one of our clients 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.
  4. “Our products are not 100% US manufactured, so they do not qualify.”
    The products need not be 100% manufactured in the United States.  To be considered qualified Export Property, at the time of sale or lease by the DISC, not more than 50 percent of its fair market value may be attributable to imported articles.
  5. “We ship our goods to a U.S. address, not a foreign address, so they do not qualify as exports.”
    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.  It does not matter who you sell to – it matters whether or not the goods are used or consumed outside the United States.
  6. “We do not manufacture the goods, but instead distribute the goods, so we would receive no benefit.”
    Distributors can qualify for the DISC benefit, as long as the goods were manufactured in the United States.