Manufacturers: Are You Using the Export Tax Break?

on August 8, 2016

WoodkIf you manufacture, produce, resell, or export goods that are produced in the US and have an end destination outside of the US, we have good news. The Interest Charge Domestic International Sales Corporation (IC-DISC) is a tax incentive that could increase your after-tax income significantly. While awareness of the IC-DISC has grown over the last few years, there are still thousands of businesses that are missing out. Are you one of them?

What is it?

The short story is that your company may be able to use an IC-DISC to reduce the tax on 50% of your export income by more than 50%. This happens because your profits are taxed at the dividend rate instead of the ordinary income tax rate.

Taking advantage of the incentive does take some legwork. As Dean Zerbe explains in his 2011 Forbes article, “IC-DISC: the Big Tax Break for Exporters:”

“So how does it all work?  Naturally big tax savings like this aren’t a walk in the park.  In a nutshell you are creating a separate entity (or sometimes several entities to maximize the tax benefits) – the “Corporation” part of IC-DISC.  The exporter pays commissions to the IC-DISC.  The commissions are deductible to the exporter, and the deemed or actual dividend payment of the commission income in the IC-DISC is taxed to the exporter’s shareholders/partners at the 15% rate (as opposed to being taxed as ordinary income – ex. 35% rate).”

Who is eligible?

The reason so few people are taking advantage of this tax break is that they don’t realize they qualify. Here is who it applies to:

  • Any company that directly exports goods that is manufactures. Goods, also called “export property,” are defined as property:
    • Manufactured, produced, grown, or extracted in the US
    • Then held for sale, lease, or rental for direct use, consumption, or disposition outside the US, and
    • The fair market value is not more than 50% attributable to articles imported into the US.
  • Any company providing architectural or engineering services performed in the United States for a structure (building, bridge) that is built outside of the U.S.
  • A company – and this is the group who misses out the most – that manufactures goods that are included in a product that is exported. For example, if you manufacture the upholstery that is put on furniture that is shipped to Canada.

Of course, you must have the proper support and documentation when doing the IC-DISC. These are potentially huge tax savings; you have to follow all the proper steps to benefit. Talk to your accountant to ensure you’re doing everything by the book.

When you export goods, you can also save money with the right packaging solution. With improved handling, damage control, and optimal materials/fit, yor overall costs are reduced. Packnet provides standard and custom packaging solutions that will protect your product and improve your bottom line. Find out more at 952-944-9124. You can request a free assessment here.