United States Tax Benefits of Exporting

By Richard S. Lehman, Esq.

THE IC-DISC

The business world is going to be a tough place for the American exporter in 2012.  The dollar will remain strong, keeping U.S. goods high priced, trade to the Euro zone will weaken while the cheap euro makes the Euro Zone highly competitive as exporters.  China will contract and desperate competitors and countries will be trying even harder to protect their own.  With export profits hard to come by, U.S. taxpayers that sell, lease or license “export property” which is manufactured, produced or grown in the United States (not more than 50% of which attributable to U.S. imports), can take advantage of strong support for their export profits in the Internal Revenue Code.

Export profits can produce substantial tax benefits with little more than establishing a new corporation dedicated almost exclusively to export profits; a separate set of export books and records, and abiding by a relatively simple set of rules that govern Domestic International Sales Corporations (now known as “IC-DISC). Rather than being organized as a mere “paper” entity for receipt of commission income only, an IC-DISC can have more substance and engage in additional export-related activities such as promotional activities, thereby enhancing its income and the benefit of the advantageous tax rates to shareholders.1/

An IC-Disc is compensated by a U.S. taxpayer that manufactures, sells or licenses “export property”.  Typically the U.S. taxpayer that establishes the IC-DISC will be related to the IC-DISC and even own the IC-DISC. The U.S. taxpayer agrees to pay the IC-DISC based on a Commission Agreement.  A portion of the U.S. taxpayer’s export profits are paid to the IC-DISC and the payment is deducted from the profits of the U.S. manufacturer, seller or licensor.  The portion of the U.S. taxpayer’s “export profits” that are paid to the IC DISC are measured under three profit scenarios.  The deduction may exceed more than 50% of the U.S. Taxpayers’ export profits, depending upon gross income, profitability and costs.

In its simplest terms, the IC-DISC is a separate corporation.  The income received by the DISC is not taxable to the DISC.  The DISC is charged with accounting separately for a U.S. “taxpayer’s export profits” and receives more than 50% of the export profits free of any U.S. taxation.2/

The existence of the DISC will be transparent to the export company’s customers.  The exporter will continue to operate its business in the same manner and its employees will continue to perform the company’s manufacturing, sales, billing, shipping and collection functions.  The fact that there is a commission agreement between the exporter and the DISC will not have to be disclosed to the exporter’s customers and no documentation provided to the customers will need to indicate the existence of, or services deemed provided by the DISC.

1/     As will be explained later, the “IC” stands for an “interest charge”.  This is a cost to be paid to the extent the Domestic International Sales Corporation does not distribute its profits to its shareholders.

2/     IC-DISC income is also typically exempt from individual state income taxes.

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Ponzi Scheme Tax Loss

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