As highlighted in my last post, the “Interest Charge Domestic International Sales Corporation” (IC-DISC) is one of the most overlooked tax benefits for small businesses which export abroad. An IC-DISC can provide the owners of small businesses with significant tax savings annually. However, before setting up a new corporation and making an IC-DISC election, it is important to understand the basic requirements which must be met in order to qualify for IC-DISC tax benefits.
Below is a summary chart of the basic requirements for an IC-DISC:
“Seems straight forward, but … “
At first glance, the basic requirements for an IC-DISC listed above seem pretty straightforward. However, there is more than meets the eye when looking deeper at the basic qualifications for an IC-DISC.
From the list of requirements in the above chart, it is crucial to determine initially whether there are “Qualified Export Receipts”, upon which an “exporter” (which is typically the primary C-Corp, S-Corp or partnership business entity), can establish a basis for paying commissions to an IC-DISC.
Generally, “Qualified Export Receipts” exist in cases where you can answer “Yes” to any of the following questions below:
- Is there sales of goods or products abroad, which are manufactured, produced, grown or extracted within the U.S. (i.e., sales of “Qualified Export Property”)?
- Is there “Qualified Export Property” which leased to third parties outside of the U.S.?
- Are there sales of “Qualified Export Property” which are sold to U.S.-based third parties, who then export the same goods or products abroad?
- Are there components or parts manufactured within the U.S., which are sold and ultimately used outside of the U.S., in the process of manufacturing finished goods or products?
- Are there engineering or architectural services performed within the U.S. related to construction projects located outside of the U.S.?
Additional Qualifications for “Qualified Export Property”
Qualified export property is:
- Manufactured, produced, grown or extracted within the U.S. by a party other than the IC-DISC;
- Held primarily for sale, lease or rental in the ordinary course of trade or business, by or to the IC-DISC for direct use, consumption or disposition outside of the U.S.;
- Less than 50% of the fair market value is attributable to imported articles or components.
The above manufacturing requirement stipulates that goods or products must be produced, grown or extracted in the U.S. by an entity other than the IC-DISC. The above destination test also requires that the primary sale, lease or rental of the property occur outside of the U.S. Finally, the goods or products themselves must not contain more than 50% of their value in foreign content, components or parts.
As you can see from the above, what is surprising is that your company does not have to be the manufacturer of goods or finished products in order to qualify for an IC-DISC. Your company does not even have to sell directly to export customers either in order to qualify for an IC-DISC. If property is sold to another U.S. third party, it can be considered “Qualified Export Property” as long as it is not significantly altered prior to being exported.
Finally, another interesting aspect of IC-DISCs which also gets overlooked is that “Qualified Export Property” does not have to be from the sale tangible goods. It can include receipts from the sale, lease or rental of export property or even engineering or architectural services performed for construction projects located abroad. One of the more interesting cases I had involved the qualification of software products for IC-DISC benefits.
As we dig deeper into IC-DISCs in my upcoming posts, you may become surprised by the different of companies which can qualify for an IC-DISC.